MReport December 2019

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28 | M R EP O RT FEATURE QM, the creditor must consider and verify the consumer's income and debt obligations in accordance with Appendix Q , which is based on a now obsolete Federal Housing Administration under- writing guide effective at the time the ATR/QM rule was developed. Most significantly, to qualify for a general QM, the ratio of the borrower's total monthly DTI by consummation cannot exceed 43%, as determined in accordance with Appendix Q. Additionally, because the CFPB in 2013 did not believe that a 43% DTI ratio represented the outer boundary of responsible lending, and the market was "especially fragile," the rule established the Patch. As indicated, the rule provides that for seven years, until January 10, 2021, or until the GSEs are no longer under federal conservatorship, any loan eligible for Fannie Mae's or Freddie Mac's purchase or guarantee—whether or not it is actually purchased or guaranteed—is a QM. Importantly, the rule does not prescribe a maximum DTI limit for Patch loans. A loan can qualify if the DTI ratio exceeds 43%, as long as the loan meets the GSE's standards including any compen- sating factors. Also, income and debt for patch loans and DTI ratios, are verified, considered, and calculated using GSE standards, not Appendix Q. Under the Rule, FHA, the Department of Veterans Affairs, and the Rural Housing Service/ Department of Agriculture (RHS) also were authorized to define which loans under their programs are QMs, and each agency has separately done so. None of the agencies set a maximum DTI ratio to qualify, or require the use of Appendix Q. Alternative QMs also have been established for smaller creditors' mortgages. For these QMs, there are no maximum DTI and Appendix Q requirements, although loans generally must be held in portfolio for three years. Any type of creditor can originate a general QM or a patch QM. Only creditors that meet certain asset, volume, and other requirements can originate the Small Creditor Portfolio QM, the Small Creditor Balloon QM, and the new Smaller Institution QM. Additionally, only creditors with loans meeting FHA, VA, or RHS requirements can originate QMs under these agencies' programs. So, If It Isn't Broken, Why Fix It? C onsidering the data, the Patch has proven to be an effective and well-trodden path to provid- ing safe, sound, and affordable QM loans to creditworthy bor- rowers who may not qualify for the General QM. In contrast, the General QM—with a relatively low maximum DTI requirement, and a static set of underwriting guidelines—has proven to be an unsatisfactory pathway to bring credit to many borrowers. One main finding of the CFPB's ATR/QM Rule Assessment Report was that Patch loans represent a "large and persistent" share of originations in the conforming segment of the mortgage market. Nevertheless, the ANPR made clear that the CFPB never intended to make the Patch permanent. The ANPR said that the CFPB did not presume that loans eligible for GSE purchase or guarantee, whether or not the GSEs are under conser- vatorship, are originated with appropriate consideration of the ability to repay. Beyond that, the CFPB ex- pressed concern that reliance on the GSEs' underwriting standards could stifle innovation and the de- velopment of competitive private- sector approaches to underwrit- ing, as well as prevent a private securitization market rebound. The Bureau also expressed the view that in the absence of the Patch, high DTI borrowers would likely choose FHA loans because of their higher DTI limits, non-QM or small creditor loans and, in some cases, smaller loan amounts or no loans at all. Finally, the U.S. Treasury Housing Reform Plan, issued in September 2019, setting forth the Trump administration's vision for a privatized and more competitive future for the GSEs, specifically supported the CFPB decision to let the Patch expire. The decision to end the Patch and the administra- tion's plans for the GSEs are con- sistent, and it seems purposely so. ANPR Feedback T he ANPR sought comment on several questions including whether: • The general QM classification should retain, substitute, or supplement its DTI ratio with another method to "measure a consumer's personal finances," such as "residual income;" • A 43% DTI ratio is an appropri- Since the Rule's implementation, mortgage lending has been overwhelmingly confined to the origination 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.

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