The Consumer Financial Protection Bureau wants to provide more flexibility in determining what counts as a more secure qualified mortgage, and is preparing to quickly finalize a rule before a possible change of administration.

The CFPB proposes to eliminate a debt-to-income ratio of borrowers which has been a key metric in determining whether a mortgage is safe, and a lender is immune from potential litigation, as part of a wider campaign of the Trump administration to take Fannie Mae and Freddie Mac out of the hands of the government.

The proposal to rewrite the qualified mortgage standard, unveiled on June 22, comes with a brief 60-day comment period and would come into effect in April 2021, a tight timeline for a major regulatory change in how lenders underwrite loans mortgage.

Speed ​​is no accident. The next presidential election could lead to the entry into office of the Democratic candidate, former Vice President Joe Biden, in January and the replacement of CFPB director Kathy Kraninger. The United States Supreme Court ruled on Monday that the office manager was an at-will employee of the president.

“They want to get something on the books,” said Richard Andreano, partner at Ballard Spahr LLP who represents mortgage lenders.

Handle loans?

A product of the Dodd-Frank Act of 2010, a qualified mortgage is a home loan that meets strict standards for the borrower’s repayment capacity and therefore protects the lender from potential litigation in the event of a borrower default. . A key feature of these repayment capacity standards is the requirement that the borrower’s debt-to-income ratio does not exceed 43%.

The CFPB proposes to create a new way to broaden the definition of QM by using the mortgage price while including the DTI as part of a larger examination of a borrower’s ability to repay the loan.

Removing the 43% DTI requirement could “put a dent in the rule for qualified mortgages,” said Susan Wachter, a professor at the Wharton School of Business at the University of Pennsylvania.

Basing the definition of a safe mortgage on interest rate or price works when times are good and home values ​​rise, Watchter said. But it doesn’t take into account a potential drop in home values ​​or economic shocks to borrowers.

This is all the more concerning as the US economy is mired in a recession due to the coronavirus pandemic, she said.

“It’s just a roller coaster ride towards disaster. There’s nothing left, ”Watchter said.

Rather than relying solely on borrowers’ debt-to-income debt levels, the CFPB proposes that any mortgage loan where the rate differential between the mortgage interest rate and the prime rate is less than 200 basis points be considered. as a qualifying mortgage. For lenders to have full litigation protection, the spread should be 150 basis points or less.

Allowing lenders and the CFPB to use price as a means of determining whether a mortgage should qualify for the full range of QM protections opens the door to “manipulating the way personal loans are structured,” Alys said Cohen, lawyer at the National Consumer Law Center. .

Market flexibility

The CFPB created another way for mortgages to qualify for coveted QM status when the Dodd-Frank rule came into effect in 2014. All mortgages guaranteed by Fannie Mae and Freddie Mac were counted as loans. the financial giants are backed by the federal government.

This exemption, known as the GSE patch, is expected to expire in January.

With the Trump administration pushing hard to privatize Fannie and Freddie in the coming years, the CFPB needed to provide additional flexibility to the entire mortgage market. Banks and other mortgage lenders were among those who pushed the agency to drop the 43% debt-to-income ratio requirement for all qualifying mortgages, not just government guaranteed loans.

“This is a step forward to improve the quality management rule in a way that protects borrowers and the financial system from undue risk, while responsibly preserving access to property for creditworthy borrowers, ”the Housing Policy Council, an industry group comprising mortgage lending giants. like Quicken Loans and Wells Fargo & Co., said in a June 22 statement.

Financial data provider CoreLogic estimates that about $ 260 billion of the $ 1.63 trillion in mortgages issued in 2018, or 16%, came from the so-called GSE patch which is due to expire in January.

The CFPB has offers keep the GSE patch until the new qualified mortgage rule is in place. The effective date of the new definition of QM would be April 2021 at the earliest or when Fannie and Freddie leave the trusteeship.

Better forecast

Expanding access to mortgages would be impossible while leaving the strict 43% debt-to-income ceiling in place, according to industry and even some consumer groups.

Debt-to-income ratios would still be taken into account when taking out loans, but would not be the deciding factor in determining whether a loan is considered secure, Andreano said.

Switching to a price-based approach would allow lenders to have a more complete view of a borrower when taking out a loan, rather than denying a mortgage on the basis of a metric that might not be. also predictive of default, said Mike Calhoun, president of the Center for Responsible Lending.

While debt levels seem intuitive about a borrower’s ability to pay off a mortgage, “it’s the least predictive of success” relative to other major lending criteria, like credit scores and credit scores. down payments, Calhoun said.

The Center for Responsible Lending is an affiliate of the Self-Help Credit Union, which has a portfolio of over $ 1 billion in home loans to low- and moderate-income borrowers. The credit union retains all credit risk on these loans.

The CFPB is not proposing to eliminate any of the other consumer protections that are part of qualifying mortgages, including provisions prohibiting interest-only loans or those with lump sum payments. These protections alone would have prevented about half of foreclosures during the financial crisis, Calhoun said.

But other consumer advocates say the qualified mortgage standard won’t work as intended without full consideration of borrowers’ cash flow and debt.

“Everyone knows DTI is flawed, but what the law requires under Dodd-Frank is an assessment of whether a borrower can repay,” Cohen said.

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