The CFPB has issued an Advance Notice of Proposed Rulemaking regarding the fate of the “QM Patch,” indicating that it will not extend the “QM Patch” permanently.
Advanced Notice of Proposed Rulemaking
In a surprise development, on July 25, 2019, the Consumer Financial Protection Bureau (“CFPB”) issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch,” which is scheduled to expire no later than January 10, 2021. The comment period is short, reflecting the urgency of promulgating a final rulemaking before the impeding “QM Patch” termination. Comments must be received by the CFPB within 45 days after publication of the ANPR in the Federal Register.
The CFPB created the “QM Patch” as a temporary provision of the qualified mortgage (“QM”)/ability-to-repay (“ATR”) regulations adopted pursuant to the Dodd-Frank Act. It exempts lenders from having to underwrite loans with debt-to-income (“DTI”) ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a QM and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.
The CFPB’s Proposal
In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently. This shocking pronouncement has potentially profound ramifications for the residential mortgage lending markets. A substantial proportion of the markets have relied extensively on the “QM Patch” in underwriting qualified mortgages, not to mention significantly reducing the role of the GSEs in these markets. For years, GSE critics have complained about Fannie Mae’s and Freddie Mac’s dominance of the residential lending markets. Yet the January 2021 “QM Patch” expiration would raise critical questions: Will the private markets be able to absorb the GSE’s large share of qualified mortgage lending? If not, what are the possible detrimental impacts on consumers, especially those in distressed communities?
Other QM Changes?
In the ANPR, the CFPB indicates that it may make other significant changes to the qualified mortgage regulations, based in part on the public comments it receives. For example, the CFPB is considering whether the general QM definition should retain a direct measure of a consumer’s personal finances, such as DTI or residual income and how that measure should be structured. The CFPB is also seeking comment on whether the definition should: (1) include an alternative method for assessing financial capacity, or (2) be limited to the express statutory criteria. Under one approach that seems to be attracting the CFPB’s interest, bright-line pricing delineation would replace the DTI criteria altogether. Under such an approach, loans with APRs exceeding the average prime offer rate by certain thresholds would be deemed rebuttable presumption QM loans or non-QM loans, as the case may be. Loans not exceeding certain thresholds would receive safe harbor QM status. Under such a bright line pricing delineation method, the loans would have to comply with other statutory criteria in order to retain QM status.
The 45-day deadline for comments seems rushed, especially considering the dramatic effect that changes to the qualified mortgage rules could have on the residential mortgage finance and housing markets. Further, in an ideal world, the CFPB should be considering amendments of the qualified mortgage/ability-to-repay rules in tandem with the federal high cost mortgage, the residential mortgage risk retention, and the loan originator compensation rules as a holistic approach rather than in isolation.