Mortgage

GSE exception to remain in place till the subscription rule is accomplished: CFPB

The Consumer Financial Protection Bureau has confirmed that loans backed by Fannie Mae and Freddie Mac will remain exempt from the agency's qualified mortgage standard until the office completes the revision of the QM rule.

The bureau's decision, announced on Tuesday, is designed to give the mortgage market, feared a quick end to the exemption, breathing space before the CFPB makes the industry’s major changes to the underwriting rule.

For the past seven years, loans approved by the government sponsored corporations' underwriting engines have been viewed as high quality mortgages that automatically meet the office's ability to repay the office's underwriting requirements. QM loans offer lenders a safe haven from legal liability.

The temporary exemption, usually granted from 2014, allows the loans secured by the GSEs to avoid a debt-to-income ratio of maximum 43%, which is still considered a QM. The exemption, known as the GSE "Patch," originally expired on January 1, 2021.

"We knew when the office first issued the QM rule that the patch should expire in 2021 and realized that … we only published a general QM proposal a few months ago," said CFPB Director Kathy Kraninger .

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The CFPB previously extended the deadline for the patch to April 1 of next year, when it announced plans to revise the definition of QM.

However, the result of Tuesday's announcement effectively means that the patch can remain with the agency indefinitely or at least until the agency's QM revision has been completed.

"We knew when the office first issued the QM rule that the patch should expire in 2021 and realized that … we only published a general QM proposal a few months ago," said CFPB Director Kathy Kraninger on Tuesday at a virtual meeting of the Mortgage Bankers Association. "It was the result of many years of discussion and our assessment of this previous rule that led us to the changes we proposed."

The CFPB's QM proposal would replace the DTI cap of 43% with a price-based threshold measured by comparing the annual percentage of a loan with the average prime offer rate for a comparable transaction.

Kraninger said the change would ensure more "on the verge" borrowers could still get a home loan.

"We believe that a price threshold is a more holistic measure of an individual's ability to repay than DTI alone," said Kraninger on Tuesday. "We also knew that the 43% DTI, if implemented and strictly followed … would really exclude access to credit and really reduce that home ownership opportunity [for] many people, especially those on the fringes."

The QM definition would continue to require lenders to consider a borrower's income or assets, debt obligations, and DTI ratio or residual income when granting a loan. Lenders would still need to review the borrower's current income or assets and liabilities.

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