CFPB issues proposals addressing GSE patch expiration

The coronavirus pandemic has taken center stage when it comes to the economy, but before the outbreak reared its ugly head in the U.S., the upcoming expiry of the “GSE patch” was among the hot-button issues of the housing market.

Now, as the patch’s expiration date inches closer, the Consumer Financial Protection Bureau has issued two notices of proposed rulemaking (NPRMs) to address its impending conclusion.

Officially the Ability-to-Repay/Qualified Mortgage (ATR/QM) rule, the patch is an exemption to the general qualified mortgage (QM) standard. The exemption applies to mortgage loans backed by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs). Via the patch, Fannie and Freddie loans are still eligible as QMs even if the borrower carries a debt-to-income (DTI) ratio above 43%, unlike loans not backed by the GSEs.

That exemption is set to sunset, either on January 2021 or when Fannie and Freddie exit conservatorship — whichever comes first. Many within the mortgage industry have been concerned about what the patch’s expiration could mean for credit availability nationwide. Consider, for example, that in 2017, about one in five GSE-backed mortgages had a debt-to-income ratio over 43 percent; the CFPB itself noted today that approximately 957,000 mortgages would be affected by the patch’s termination, and that many of those loans would either not be made or would be made at a higher price once the patch has ended.

In place of the patch, the new proposals call for the replacement of the DTI threshold with a “price-based approach.” Under the first NPRM, a loan would meet the general QM definition only if its annual percentage rate (APR) exceeds average prime offer rate (APOR) for a comparable transaction by less than two percentage points as of the date the interest rate is set. Higher thresholds would be provided for mortgages with smaller loan amounts.

It’s an approach that CFPB director Kathleen Kraninger signaled to lawmakers in a January letter, with today’s proposal fleshing out the plan more fully. The CFPB, according to a statement, “preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.”

DTI ratio, while removed from the general QM definition, would still be used by the lender to evaluate the borrower’s creditworthiness, along with income, assets and debts.

The second NPRM would assure that the patch stays in place until the changes made by the first proposal are enacted. Put simply, the GSE patch wouldn’t expire until the CFPB’s new price-based proposal goes into effect.

“The GSE patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” Kraninger said. “The Bureau is proposing to replace the patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them.

“The Bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE Patch.”

Vince Malta, president of the National Association of Realtors, met the proposals with praise.

“America’s Realtors applaud the CFPB’s action to provide a temporary QM patch extension, and commend the Bureau and Director Kraninger for acting on behalf of our nation’s consumers and homebuyers at a time when market stability is so critical,” Malta said. “Perhaps most importantly, we appreciate the Bureau’s decision to eliminate a hard DTI standard, and we look forward to more closely examining the proposed replacements and their impact on homebuyers over the coming months.”

Mortgage Bankers Association (MBA) President and CEO Robert Broeksmit likewise thanked the CFPB for the new proposals.

“MBA appreciates the CFPB’s proposed changes to the QM Rule and extension of the GSE Patch,” he said. “As proposed, the regulatory changes would seek to ensure creditworthy borrowers have access to sustainable mortgage credit without disruption to the overall mortgage market.

“MBA looks forward to reviewing and commenting on both rules, and we will continue to work with policymakers and all other stakeholders to ensure borrowers are both protected and have access to credit throughout the mortgage lending process.”