Last week, the Consumer Financial Protection Bureau issued an advanced notice of proposed rulemaking relating to the impending expiration of a mortgage rule that affects two large American guarantors. The ANPR seeks comments from interested parties within 45 days of its upcoming publication in the Federal Register.
At issue is what’s known as the qualified mortgage rule, which the bureau implemented to curb abuses that triggered the 2008 meltdown. The rule, known as the QM Patch, allows government-sponsored enterprises Fannie Mae and Freddie Mac to sidestep stricter mortgage underwriting requirements which require abiding by the full scope of the Ability to Repay/Qualified Mortgage rule. That rule requires lenders to adequately verify a borrower’s ability to repay their mortgage in the underwriting process. This includes a review of a borrower’s debts and assets to ensure they have the ability to repay the loan, with a stipulation that their debt-to-income ratio not exceed 43 percent.
Mortgages underwritten with an adverse debt-to-income ratio can subject the lenders to legal liability. The QM Patch shields Fannie Mae and Freddie Mac from such liability.
Recalling that the mortgage market was “especially fragile” following the mortgage crisis, and that GSE-eligible loans made up a significant majority of the market, the ANPR states that in 2013 “the bureau believed that it was appropriate to consider for a period of time that GSE-eligible loans were originated with an appropriate assessment of the consumer’s ability to repay” despite an adverse ratio in order to “ensure access to responsible, affordable credit for consumers with DTI ratios above 43 percent.”
The GSEs’ exemption from these rules has significantly elevated their share of the mortgage market, giving rise to concerns about an uneven playing field holding back other lenders. Fannie Mae and Freddie Mac are the two largest purchasers of mortgages in the nation, both with assets in the billions of dollars.
“The national mortgage market readjusting away from the Patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection,” CFPB Director Kathy Kraninger said in a statement. “We want to hear all perspectives on how to move beyond the GSE Patch, the impact on credit, the role of the private mortgage market, and possible modifications to the definition of qualified mortgages and the rules governing the documentation of debt and income.”