In 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, called Qualified Mortgages, or QM, that are presumed to comply with the ATR requirement given product and borrower credit characteristics that make the loans lower risk. The product protections for a loan to be considered a QM are outlined in the Act, and the credit characteristics are left to the Consumer Financial Protection Bureau (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 three exceptions to permit lenders to obtain QM status while making loans above 43%. First, loans insured by the Federal Housing Administration, Rural Housing Services, and Veterans Administration would be covered instead by rules those agencies develop. Second, community banks that hold loans in portfolio would automatically receive QM status regardless of DTI, since these loans have historically performed well. Finally, since CFPB wanted to permit higher DTI loans with compensating factors but did not want to prescribe detailed underwriting criteria itself, it exempted loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac (the government-sponsored enterprises, or GSEs) from the DTI limitation for seven years or until the GSEs cease to be in conservatorship.
In the absence of the GSE provision, 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.
About the Authors
Eric Stein is Senior Vice President of Self-Help, a credit union and community development organization that creates ownership and economic opportunity for all. Self-Help has provided $8.5 billion in financing and has 150,000 members. Self-Help’s policy affiliate, the Center for Responsible Lending, is a nonprofit, non-partisan organization that protects homeownership and family wealth by fighting predatory lending practices. Eric served as Special Advisor to Federal Housing Finance Agency (FHFA) Director Melvin L. Watt. FHFA is conservator of Fannie Mae and Freddie Mac. He also served as Deputy Assistant Secretary for Consumer Protection in the U.S. Department of the Treasury. He was responsible for developing, and then working with Congress to enact, legislation to create the Consumer Financial Protection Bureau and reform the mortgage market. Eric holds a law degree from Yale Law School and a BA from Williams College.
Mike Calhoun is president of the Center for Responsible Lending (CRL), the policy affiliate of Self-Help, which is the nation's largest community development lender. For more than 30 years, Mike has been on the front lines of working for economic justice. At CRL, he provides management and policy leadership. Based in DC, he often testifies in Congress and appears frequently in national media as an expert on financial issues. Prior to joining CRL in 2001, Mike led several lending divisions at Self-Help, providing responsible consumer loans, mortgages, and small business loans, as well as heading an innovative program to provide national capital for affordable home loans. He has represented families to secure civil rights and consumer protections, including working for 10 years as a legal aid attorney. He is a former member and chair of the Federal Reserve Consumer Advisory Committee. Mike received his BA degree in economics from Duke University and his JD degree from the University of North Carolina.