CFPB will retire debt-to-income requirement for qualified mortgages

The Consumer Financial Protection Bureau has proposed ending the current debt-to-income requirements behind qualified mortgage status under the Truth in Lending Act’s ability-to-repay requirements.

The Consumer Financial Protection Bureau has proposed ending the current debt-to-income requirements behind qualified mortgage status under the Truth in Lending Act’s ability-to-repay requirements.

The agency plans to replace the DTI requirements of the general QM definition in Regulation Z with a price-based approach. 

The bureau had previously issued a rule that established a general QM standard for loans where the consumer’s DTR ratio is 43 percent or less and the loan meets the other statutory QM requirements.

The agency also plans to extend a provision granting QM status to certain mortgage loans eligible for purchase or guarantee by either of the Government Sponsored Entities Fannie Mae or Freddie Mac. Under the patch, loans are eligible for QM status even if the DTI ratio exceeds 43 percent.

A price-based approach would be “a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone,” the bureau said. Under the new rule, QM eligibility would be determined by a price threshold for most loans as well as higher price thresholds for smaller loans. Lenders would also need to take into account a consumer’s income, debt, and DTI ratio or residual income and verify income and debts.

The CFPB also proposed extending the current GSE patch until the general QM definition is finalized, likely not until April 1, 2021 at the earliest, the bureau said.. The patch is currently set to expire in January 2021 or when Fannie Mae and Freddie Mac exit conservatorship, whichever comes first. The expiration would affect about 957,000 mortgage loans which would either not be made or made at a higher price, the CFPB said.

“The GSE patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” said CFPB Director Kathleen Kraninger. “The bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE patch.”

Fredrikson & Byron Law