CFPB throws mortgage market another curveball

The Consumer Financial Protection Bureau’s mortgage underwriting rule remains a political football following the agency’s decision to delay a key compliance date.

Some have lauded the decision to postpone until October 2022 the effective date for overhauling the Qualified Mortgage standard. But others worry it is a precursor to more changes in the QM framework, which has kept evolving since 2014.

“The prospect that the CFPB may revisit the final QM rule puts the mortgage industry in limbo,” said Quyen Truong, a partner at Stroock and a former assistant CFPB director and deputy general counsel. “Now they have uncertainty about the future and the prospect of more demanding requirements.”

The compliance delay will prolong an exemption from the QM rule for Fannie Mae- and Freddie Mac-backed loans, just as the CFPB was on the threshold of weaning lenders off of that special treatment.

The framework currently in place recognizes loans with debt-to-income ratios below 43% as a Qualified Mortgage, which are protected from liability. But the exemption for the government-sponsored enterprises, known as the GSE “patch,” allows QM loans backed by the GSEs to have higher DTIs.

Some observers welcomed the CFPB’s delay, saying that removing the GSE patch could cause more disruption in an already volatile housing market.

Bloomberg News

To replace the patch but smooth the transition for GSE-backed lenders, former CFPB Director Kathy Kraninger essentially rewrote the QM rule.

Instead of the DTI limit, all lenders had to follow a pricing-based threshold to achieve QM status. The new QM standard has been optional this earlier this month. It was previously set to become mandatory in July, at which point the patch would go away.

But by delaying both the mandatory deadline and the elimination of the patch for a year and a half, some observers say acting CFPB Director Dave Uejio essentially has allowed a further loosening of underwriting requirements since more risky loans can be considered QM.

Flexibility with more options

Between now and the 2022 deadline, lenders have the flexibility to achieve QM either by using the patch, following the 43% DTI limit or using the new pricing threshold.

“It will pull some of those non-QM loans into the QM bucket now,” said Ron Haynie, senior vice president of mortgage finance policy at the Independent Community Bankers of America. “What it does is provide lenders a choice of what they would like to use: the old QM or the new QM.”

Yet others welcomed the delay, saying that removing the patch could cause more disruption in an already volatile mortgage market. An uptick in interest rates is expected to slow the refinancing boom, one of the few economic bright spots during the coronavirus pandemic.

“The patch was a valuable tool and we perhaps are not ready to eliminate that,” said Carrie Hunt, an executive vice president of government affairs and general counsel for the National Association of Federally-Insured Credit Unions.

Many were surprised at Uejio’s about-face. The agency has long wanted to eliminate the GSE patch, but the extension means loans with higher DTIs will continue to be QM. Roughly 30% of loans backed by Fannie and Freddie have DTIs above 43%.

The QM rule finalized under Kraninger had broad support from banks and mortgage lenders. Without the changes, eliminating the patch would mean a big chunk of GSE-backed loans with high DTIs would lose QM status. The new pricing threshold was seen as workable. It will give QM status to loans with annual percentage rates no higher than 2.25 percentage points above the average prime offer rate.

“It was a good solution to the patch going away,” Pete Mills, a senior vice president at the Mortgage Bankers Association, said of Kraninger’s rule.

He added that the delay raises the question of whether the GSE exemption will exist indefinitely and the CFPB will consider additional QM changes.

“It’s not clear now if the patch is going to be around longer,” said Mills. “This injects a measure of uncertainty into the market because [the CFPB] may tinker now with the final QM rule.”

Yet Hunt of NAFCU said the agency has to take into account the outsized role of the GSEs, and the need of smaller institutions to have more lending flexibility.

“Market stability and keeping the status quo is incredibly important because credit unions do make loans that don’t fit into the traditional QM definition because we are trying to reach people that may be on the margins,” she said.

Still, the delay to the QM rule is likely to be challenged once Uejio’s notice of proposed rulemaking is finalized.

The CFPB said it proposed delaying the QM rule’s mandatory compliance date “to help ensure access to responsible, affordable mortgage credit and to preserve flexibility for consumers, particularly those affected by the COVID-19 pandemic.”

The CFPB said it plans to evaluate the QM rule and will consider at a later date whether to initiate another rulemaking.

Debate over pricing threshold continues

Some who supported Kraninger’s rule were relieved that for now the agency is still leaving the new APOR standard on the table.

“To the extent there is a silver lining here is that the CFPB preserved the pricing-based approach,” said Karan Kaul, senior research associate in the Housing Finance Policy Center at the Urban Institute.

The APOR pricing threshold was seen as shot in the arm for jumbo lenders and nonbanks such as Detroit-based Rocket Mortgage, the large online lender formerly known as Quicken Loans. Many large nonbanks rolled out lending programs before March 1 to meet the new pricing requirements.

“It’s a huge positive for the industry especially during the optional period because now there are more methods to QM [status] with the [GSE] patch and APOR,” said Scott McNulla, senior director of regulatory compliance at SitusAMC. He added, “Jumbo loans across the board have greater flexibility to become QM loans.”

“We’re going to see some expansion of non-QM lenders that can now make a QM loan based on APOR,” McNulla said,

But others view loan pricing as the wrong way to determine a borrower’s ability to repay.

“Pricing doesn’t have anything to do with a borrower’s ability to repay,” said Haynie. “Pricing can be manipulated and will be manipulated to have as many loans as possible get QM safe harbor treatment. And no DTI ratio threshold means those loans can be 100% DTI.”

Others are concerned about the role of DTI ratios generally in mortgage lending and whether they will fall out of favor.

“There is a lot of confusion that DTI would be going away,” Kaul said. “DTI is central to mortgage underwriting even without a hard cap of 43%.”

The CFPB could open the door to other alternative approaches for the QM rule over the next 18 months, looking closely at data and how the mortgage market responds to the loosening of underwriting rules.

“So long as you have both the GSE patch and the APOR-based QM there is greater latitude for lending,” said Truong. “The question is how long that will be in play and what will come after it if the CFPB were to modify the rule?”

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