March 23, 2020

Panel Spotlight: Whither the Housing Market—GSE Reform and QMs

Nicholas S. Agnello and Kenneth A. Markison

At the CFSC 2019 Winter Meeting, the Truth in Lending & Housing Finance Subcommittee presented a panel entitled, “Whither the Housing Market? Proposed Changes to the GSE’s and Qualified Mortgage Rules.” The panel was moderated by Lauren Campisi of McGlinchey Stafford PLLC, and both Ken Markison of Weiner Brodsky Kider PC and Rich Horn of Garris Horn, PLLC were speakers on the panel. The panel considered the “Patch” or “Temporary GSE QM” in the context of the Qualified Mortgage/Ability to Repay (“QM/ATR”) rule, the implications of the Consumer Financial Protection Bureau’s (“CFPB’s”) intention to allow the Patch to sunset on January 10, 2021, and the Patch’s relationship to Government-Sponsored Enterprise (“GSE”) reform.

The panel first reviewed the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires the lender to reasonably determine at or before closing a borrower’s ATR for most residential mortgage transactions. In 2013, the CFPB issued a final rule setting forth the ATR requirements and establishing certain protections from liability under these requirements for QMs.

QMs generally may not include several risky features (such as loan terms longer than 30 years, negative amortization, interest-only options, etc.). Also, the lender must consider the income, assets, and debt obligations of the borrower, and the points and fees for a loan generally must not exceed 3%. The final rule authorized several types of QMs, including QMs for loans insured or guaranteed by the Federal Housing Administration, Veterans Administration, and the Rural Housing Service, as well as a general default QM (“General QM”).

Notably, the final rule established the General QM such that the borrower’s debt-to income-ratio (“DTI”) could not exceed 43% and incorporated an Appendix Q into the rule to determine debt and income. Nevertheless, the Bureau concluded that a 43% DTI should not be the outer bounds of lending and that the introduction of the new General QM should not unduly disrupt the market. Accordingly, the CFPB also established the “Patch” as a temporary alternative so that loans meeting GSE requirements could qualify as QMs until January 10, 2021 (or until the GSEs left Federal conservatorship). To qualify as a QM under the Patch, the loan must be eligible for GSE purchase or securitization and meet the GSE’s requirements as well as most other QM requirements. Unlike the General QM, however, the Patch does not include a rigid 43% DTI limit. Instead, the GSEs’ underwriting systems use a range of factors to determine a borrower’s ATR.

Since the QM/ATR requirements became effective, there has been little non-QM lending—only $10–20 billion of a $1.8 trillion dollar mortgage market. At the same time, the number of loans originated using the Patch has been large for several reasons, including the industry’s familiarity with GSE standards, the pervasiveness of GSE technology, and, most importantly, the flexibility of requirements for borrowers with greater than 43% DTI. It has been estimated that one-sixth of the QM market has needed the Patch to qualify for QM status.

Nevertheless, in July 2019, the Bureau announced that it intended to allow the patch to expire as scheduled on January 10, 2021, with the possibility of a short extension for a transition period. The CFPB advised that the Patch was never intended to be permanent, that its continuation creates excessive reliance on GSE underwriting standards, and that its availability stifled innovation and competition in the mortgage market.

At that time, the CFPB also invited comment through an Advance Notice of Proposed Rulemaking (“ANPR”) on what changes might be made to the ATR/QM rule in light of the Patch’s expiration. Comments were specifically invited on several topics including whether (i) a DTI limit is necessary, (ii) higher DTI ratios should be permissible if compensating factors are present, (iii) QM status should be afforded to loans based on their APRs, and (iv) the current limits should be maintained to determine if QMs qualify for a rebuttable presumption or an absolute safe harbor. The ANPR also requested comment on the timeframes needed to make changes to comply with a revised ATR/QM rule.

Many of the comments received by the CFPB urged that it move away from the 43% DTI limit. Another common theme was dissatisfaction with use of Appendix Q as a reference point for ATR underwriting standards. Many also expressed concern that the process should not be rushed and that the Patch should be extended until a replacement paradigm is developed and there is sufficient time to comply.

The day before the Truth in Lending & Housing Finance Subcommittee’s panel, in Congressional correspondence, CFPB Director Kathy Kraninger (“Director”) reportedly wrote that the CFPB would propose a new ATR/QM rule that would “move away” from the use of a specific DTI requirement for QM. It would instead propose an alternative such as a “pricing threshold.” The Director also advised that she anticipates releasing the new proposed rule no later than May of 2020. The correspondence also advised that the CFPB is considering an alternative approach to QM eligibility based on the seasoning of loans that is likely to be addressed in a separate rule.

The CFPB’s purpose in ending the Patch is consistent with the Administration’s purposes in its GSE reform plan released by the Treasury Department on September 6, 2019. Both are intended to open the GSEs to competition and facilitate innovation. The GSE reform plan would allow other guarantors of mortgages as well as the GSEs to pay for an explicit government guarantee and innovate and compete in the secondary mortgage market. The end of the Patch also is intended to open the way for innovation and competition inside and outside the QM space.

Although GSE reform is likely to take several years, changes to the ATR/QM rule can be expected this year. One thing is certain—the stakes are high. Considering that the Patch has made QM loans available to millions of borrowers, any changes are certain to be scrutinized carefully to ensure they do not adversely affect borrowers and the mortgage market. Given the importance of this matter, these issues will garner considerable attention throughout the year.

Nicholas S. Agnello

Burr Forman, LLP

Nicholas S. Agnello is a partner at Burr Forman, LLP in the financial services litigation practice group. 

Kenneth A. Markison

Weiner Brodsky Kider PC

Kenneth A. Markison is Of Counsel at Weiner Brodsky Kider PC. Before joining the firm, Ken served for decades as a leader in the housing and financial services legal community in both industry and government. He now advices lender and vendor companies, trade associations and other organizations that draw on his deep experience and expertise regarding virtually every law regulating the mortgage markets. Ken is a frequent speaker at conferences across the country, an author of regulatory publications and a prominent voice with legislators and regulators at all levels of government.