CFPB finalizes overhaul of mortgage underwriting rules

The Consumer Financial Protection Bureau on Thursday issued two final rules revising the definition of “qualified mortgages” that the bureau said would promote access to credit and transition the mortgage market away from a regulatory exemption given to Fannie Mae and Freddie Mac.

The CFPB finalized one rule establishing a new general QM standard, which was unchanged from a June proposal. It adopted a pricing threshold to determine if loans can avoid liability under ability-to-repay requirements, replacing the current debt-to-income limit of 43%. The final QM rule would give lenders relief for loans capped at 150 basis points above the prime rate.

“Through this General QM Final Rule, we are working to create an appropriate, more flexible General QM loan definition,” said CFPB Director Kathy Kraninger in a press release. “Our final rule’s price-based approach strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.”

The bureau said that it determined that a loan’s price is a strong indicator of a borrower’s ability to repay and is a “more holistic and flexible measure” than DTI alone.

The rule is sure to please many in the housing market who have seen the 43% DTI limit as too restrictive. But some critics worry the CFPB’s final QM rule would have the effect of pushing up housing prices.

Bloomberg News

The rule is sure to please many in the housing market who have seen the 43% DTI limit as too restrictive. Many loans have been able to avoid that cap because it doesn’t apply to mortgages backed by Fannie Mae and Freddie Mac, meaning they can be riskier and still attain QM status. But that exemption is due to expire next year, resulting in several loans guaranteed by the mortgage giants no longer being in compliance.

But some critics worry the CFPB’s final QM rule would have the effect of pushing up housing prices.

“It’s a huge victory for the housing lobby because it eases credit limitations that were put in place in 2013 that helped fuel a massive house price boom that we are still in the middle of, and this eases credit even further,” said Ed Pinto, resident fellow and director of the American Enterprise Institute’s Housing Center. “It will potentially, over time, lead to more upward pressure on home prices and will make housing even more out of reach for low-income homebuyers, creating a further problem with the supply-demand imbalance.”

The 2010 Dodd-Frank Act requires that loans meet certain standards including a borrowers’ ability to repay a loan at the time of origination in order to receive QM status.

The general QM final rule was created, in part, to replace a temporary exemption granted in 2014 to Fannie and Freddie to help the housing market recover from the last financial crisis. The exemption is set to expire on July 1, 2021, or on the date the government-sponsored enterprises exit conservatorship, whichever comes first. The exemption, known as the GSE patch, automatically gave QM status to loans approved by the GSEs’ underwriting engines, including loans that exceeded the original QM rule’s 43% DTI cutoff.

A loan receives a rebuttable presumption that the consumer had the ability to repay if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.

The rule provides higher pricing thresholds for smaller loans, certain manufactured housing loans and subordinate-lien transactions. It also retains underwriting requirements for certain product features and limits on points and fees.

In the second final rule, the CFPB detailed how a loan can automatically gain QM status if a lender holds on to it for a while. Loans can earn the “seasoned” QM label if they are on the lender’s balance for at least three years.

The seasoned QM final rule was similarly unchanged from a rule proposed in August. It applies to first-lien, fixed-rate loans that have been held on a lender’s balance sheet for over 36 months and meet certain underwriting and performance requirements. They must also comply with general restrictions on points and fees and other product features, such as no balloon payments.


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