With the January 2021 expiration of the so-called “QM Patch” looming, what courses of action are available to the CFPB?
One of the most vexing issues currently facing the Consumer Financial Protection Bureau (“CFPB”) is the fate of the so-called “QM Patch”. The CFPB’s ability-to-repay/qualified mortgage regulations promulgated pursuant to the Dodd-Frank Act require creditors to make a reasonable, good-faith determination at or before consummation that a consumer will have a reasonable ability to repay the loan according to its terms. (The obligation applies to a consumer credit transaction secured by a dwelling.)
The regulations provide:
- a “safe harbor” for compliance with the ability-to-repay rules to creditors or assignees of loans that satisfy the definition of a qualified mortgage and are not higher-priced mortgage loans; and
- a “rebuttable presumption” of compliance with the ability-to-repay rules to creditors or assignees for higher-priced mortgage loans.
A “higher-priced mortgage loan” has an APR exceeding the average prime offer rate by 1.5 or more percentage points for first-lien loans, or by 3.5 or more percentage points for subordinate-lien loans.
What is the QM Patch?
In many instances, in order for a loan to achieve QM status, it must be underwritten in accordance with exacting standards of Appendix Q. However, the CFPB regulations eliminate this particular requirement if the loan is eligible for purchase by, among others, Fannie Mae and Freddie Mac. Consequently, a loan satisfies the QM Patch if it can be sold to one of the GSEs, and meets certain other QM criteria. (Such criteria include that the points do not exceed the three percent threshold, and the loan is fully amortizing and doesn’t have a term exceeding 30 years.)
The QM Patch has significantly enhanced the presence of the GSEs in the QM market, as the GSEs are in effect backstopping the underwriting of these loans. The regulations scheduled this exemption to expire upon the earlier of the termination of the conservatorship of the particular GSEs or January 10, 2021. What the rule did not anticipate is that the conservatorship of the GSEs would continue years after the effective date of the CFPB regulations. With no conservatorship termination in sight, the January 2021 QM Patch expiration looms large. Indeed, the CFPB must act soon to enable the market to adjust to any significant departures from the current arrangement.
How Might the CFPB Address the QM Patch’s Pending Expiration?
The CFPB has a number of options at its disposal. First, it could opt to extend the current QM Patch. Logistically, this may be the path of least resistance. However, to GSE critics who want to shrink the government mortgage footprint, this option is unpalatable. These critics believe that the QM Patch impact is too substantial and that the GSE backstop crowds out the private sector. The open question is whether the private sector could realistically absorb the market share currently held by the GSEs through the current QM Patch.
Second, the CFPB could eliminate both the QM Patch and Appendix Q and create a level playing field for the QM market. This approach would retain most of the ATR/QM product eligibility features and a bright line delineation between Safe Harbor and Rebuttable Presumption QM loans based upon the APR. This option would eliminate the current debt-to-income ratio requirements, but ensure that only the most low risk loans be accorded the Safe Harbor QM designation.
Third, the CFPB could eliminate the QM Patch and Appendix Q and permit lenders to underwrite loans to an established underwriting guide such as the FHA. The challenge for this approach is identifying a benchmark that is acceptable to a wide range of the market.
Other options at the CFPB’s disposal include: (1) allowing the lender to underwrite using its own approved and validated underwriting model (while retaining the other components of the ATR/QM criteria, including the Safe Harbor/Rebuttable Presumption bright line tests; and (2) appointing industry stakeholders to create a de novo AUS that everyone would ultimately use.
With the January 2021 deadline looming, the CFPB needs to act soon to enable markets to adjust to the QM Patch replacement.