MReport December 2019

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26 | M R EP O RT FEATURE T his past summer, the Consumer Financial Protection Bureau (CFPB) reopened a high- stakes rulemaking that is expected by many to redefine the require- ments for the Qualified Mortgage (QM) under the Ability to Repay/ Qualified Mortgage Rule (ATR/ QM Rule or Rule). When the rulemaking process closes, a new definition is expected to establish the criteria that most borrowers will have to meet to obtain the most affordable housing credit for years to come. On July 25, 2019, in an Advance Notice of Proposed Rulemaking (ANPR), the CFPB announced, to the surprise of many, that it planned to allow the "Temporary GSE QM" or "Patch" to expire at the beginning of 2021. The Patch enables mortgage loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac (the GSEs) to be treated as QMs. The ANPR in- vited comments on the possibility of a short extension of the Patch for an "orderly transition." More importantly, for the long term, the ANPR also invited comments on whether and how the General QM, which is intended to be avail- able for all mortgage loans meeting its requirements, should be revised in light of the Patch's planned expiration. Before the ANPR was issued, the CFPB issued a request for in- formation in June 2017, in connec- tion with its statutorily mandated reassessment of the ATR/QM Rule. Also, beginning in January 2018, the Bureau issued several RFIs under its "Call for Evidence" that sought public comment on the range of the CFPB's enforcement, supervision, rulemaking, market monitoring, and financial educa- tion activities. These included RFIs requesting information on the CFPB's rulemaking process, the Bureau's adopted regulations, and its new rulemaking authorities. In response to the RFIs, the CFPB re- ceived several hundred comments from lenders, industry groups, consumer advocacy groups, and individuals concerning the rule. Since the rule's implementation, mortgage lending has been over- whelmingly confined to the origi- nation of QM loans. According to the Urban Institute, which admits estimates of the non-QM market are difficult to make, non-QM originations in 2018 were $20 to $30 billion of $1.8 trillion total originations. A large proportion of QM loans were originated under the Patch, including up to nearly a million loans that would not have qualified as QM loans without the Patch. In the ANPR, the Bureau cited estimates that there were approximately six million closed- end first-lien residential mortgage loans in the U.S. in 2018, of which 52%, or roughly 3.12 million, were purchased or guaranteed by the GSEs. Of these 3.12 million loans, approximately one-third of GSE loans or one-sixth of all QM loans, had a debt-to-income (DTI) ratio greater than 43%, exceeding the maximum DTI ratio permitted for general QM loans. Reportedly, a large proportion of these above-43% DTI loans are loans to low- and moderate-income and minority borrowers. It appears that while filling the Patch's shoes will be challenging, it may prove to be the best course if the Patch expires so the mortgage market can continue to serve the range of borrowers served today. To better understand the issues around the Patch, some back- ground is helpful. Background I n January 2014, when the ATR/ QM Rule became effective, having been finalized a year before, it implemented the provi- sions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Act) requir- ing that generally for closed-end residential mortgage loans, credi- tors must make a reasonable and good faith determination at or before closing that the consumer will have a reasonable ability to repay the loan. The Rule codified the eight factors the Act prescribed that must be considered in making such a determination. Consistent with the Act, the Rule also provided the alternative of complying with the ability to repay requirement by originating a QM loan, which has both bright line standards and a presumption of compliance. To qualify as a QM, a mortgage, generally, must meet certain statutory restrictions under the act that prohibits "risky features" including: negative amor- tization; interest only or balloon payments; a term greater than 30 years; and points and fees exceed- ing specified limits. A QM loan must be underwrit- ten based on a fully amortizing schedule using the maximum rate permitted during the first five years, as well as a payment sched- ule that fully amortizes the loan over the loan term and takes into account all mortgage-related obliga- tions. Underwriting must also include verifying and documenting the income and assets relied upon for repayment and complying with any guidelines or regulations established by the CFPB relating to the ratio of total monthly debt- to-monthly income or alternative measures of ability to pay regular expenses after payment of total monthly debt. Mortgages meet- ing the QM requirements gain either a safe harbor or rebuttable presumption of compliance based on whether the Annual Percentage Rate (APR) for the loan is within 150 basis points of the Average Prime Offer Rate (APOR). Under the Rule for a general Removing the Patch and Reopening the QM Debate The end of the patch and revision of the QM is likely to set the standards for borrowers' access to affordable mortgage credit for years to come. By Ken Markison

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