The current TILA/Reg Z Ability-to-Repay/Qualified Mortgage rule established by the Dodd-Frank Act includes a temporary category of qualified mortgage for loans eligible for sale to Fannie Mae or Freddie Mac as Government Sponsored Enterprises (GSEs). It is set to expire on January 10, 2021 and is the Ability-to-Repay category for a large percentage of residential mortgages currently being originated. To complicate matters further, the GSE Patch expires automatically if the GSEs are no longer operating under the conservatorship of the Federal Housing Finance Agency (FHFA), and proposals to reorganize or replace the GSEs are ongoing, although timing is uncertain.
The CFPB’s stated intent, assuming that the GSEs do not come out of receivership or are not replaced before January 10, 2021, is to let the GSE Patch expire as scheduled, with a short extension if necessary to minimize market disruption. At the same time, the CFPB also intends to implement some modifications to the qualified mortgage rule and the rules governing the documentation of debt and income (sometimes referred to as ‘Appendix Q’ underwriting standards).
One area of focus for the ANPR is whether the modified rule should permit debt-to-income (DTI) ratios in excess of 43%, which the GSE Patch currently allows but that the ‘General QM’ category does not. The CFPB is requesting comment on whether the modified rule should continue to use DTI ratios as a measure of a consumer’s personal finances, and what the maximum ratio should be, or whether another measure, such as ‘residual income,’ should be substituted or included for consideration along with DTI. ‘Residual income’ is generally defined as the monthly income that remains after a consumer pays all personal debts and obligations, including the prospective mortgage.
The CFPB also requests comment on other changes to Appendix Q or to Reg Z that might smooth the market transition away from the GSE Patch to a modified general QM loan definition. Comments were due by September 16th. The short comment period probably reflects some of the urgency at the CFPB to generate a proposed rule, final rule and set an implementation period all before the GSE Patch expires in about sixteen months.