WASHINGTON, D.C. – Eric Stein, Senior Vice President at Self-Help, a community development lender and parent of the Center for Responsible Lending (CRL), released the following statement after the Consumer Financial Protection Bureau (CFPB) announced, in a letter to Members of Congress, that its forthcoming proposal will not rely solely on a loan’s debt-to-income ratio (DTI) in determining whether it is a qualified mortgage (QM) after the expiration of the “GSE Patch,” which grants an exemption for loans eligible for sale to Fannie Mae and Freddie Mac:
We welcome Director Kraninger’s announcement that CFPB’s proposed rule will not rely solely on DTI to determine whether a borrower is able to receive QM protections. While DTI is relevant in assessing a borrower’s ability to repay their loan, it is by no means the only factor and thus should not be the only factor in determining whether or not loans should be considered QM.
We also support CFPB’s approach of establishing a loan price limit above which loans would no longer be considered QM, due to the elevated risks of higher priced loans, and below which loans would be considered QM so long as they are fully documented and meet the important QM product protections. This approach will allow lenders to make a holistic assessment of a borrower’s ability to repay and will not arbitrarily exclude low-income borrowers and communities of color from QM, as imposing a strict DTI limit would. It will be important for CFPB to ensure in QM that lenders consider and verify debts and income and to establish protections for borrowers who receive adjustable rate loans. We look forward to working, along with other stakeholders, with CFPB as it develops the QM rule.
In July 2019, CRL released A Smarter Qualified Mortgage Can Benefit Borrowers, Taxpayers, and the Economy, a report urging CFPB to ensure widespread access to safe and sustainable loans by revising its mortgage rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Otherwise, an expiring provision will cause a significant number of mortgages to face new legal liability, and these loans likely would not be originated at all or would have higher costs and riskier terms.
After the passage of the Dodd–Frank Act, Congress required lenders to make a reasonable and good faith determination that the borrower has the ability to repay a mortgage loan (ATR) before the loan is made. It also created a category of loans that are presumed to comply with the ATR requirement, called Qualified Mortgages or QM. The product protections for a loan to be considered a QM are outlined in Dodd-Frank, and the credit characteristics are left to the CFPB to determine.
In setting the borrower credit characteristics, CFPB established a debt-to-income ratio (DTI) limit of 43% for QM loans and also provided a number of exceptions to permit lenders to obtain QM status while making loans above 43% when other underwriting factors suggested that the borrower could reasonably repay the loan.
Loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac (the GSEs) were included in these exemptions for seven years or until the GSEs cease to be in conservatorship. In the absence of this exemption, called the GSE Patch, almost 19% of the loans guaranteed by the GSEs over the last five years—3.3 million loans—would not have been QM. Letting the Patch expire on schedule in January 2021 and subjecting these loans to a flat 43% DTI limit would thus have a dramatic impact on mortgage lending in the country. CRL’s report found that such disruption would not be justified because statistical analysis demonstrates that, on its own, DTI is only minimally predictive of risk for near-prime loans.
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