Lenders and Consumer Advocates Call for Ending DTI Requirements for Borrowers
Written By: Joel Palmer, Op-Ed Writer
According to a coalition of mortgage lenders and industry trade groups, as well as consumer advocacy and civil rights organizations, the Consumer Financial Protection Bureau (CFPB) should consider using the upcoming expiration of the GSE patch as an opportunity to eliminate the debt-to-income (DTI) requirement on qualified mortgages. The coalition expressed this stance in a letter signed by 23 companies and organizations. The letter was written in response to CFPB’s recent Advance Notice of Proposed Rulemaking related to the expiration of the bureau’s Ability to Repay/Qualified Mortgage (ATR/QM) Rule, also known as the GSE patch.
First implemented in 2014, the GSE patch is an exemption to the general qualified mortgage (QM) standard that requires a borrower to have a debt-to-income ratio of 43 percent or less. The exemption applies to mortgage loans backed by Fannie Mae and Freddie Mac. This provision, is scheduled to expire January 10, 2021.
The coalition proposes the following for the ATR/QM rule:
Eliminate from the general QM category the debt-to-income ratio requirement and the associated Appendix Q.
Maintain and enhance the existing ATR regulatory language.
Maintain the existing QM statutory safe product restrictions that prohibit certain risky
loan features (e.g., no terms over 30 years, no negative amortization, no interest-only payments, no balloon payments, documented and verified income, etc.) and clarify provisions related to documentation and verification of income.
“The GSE Patch has provided an alternative to the DTI ratio threshold, as well as relief from the rigid requirements for verifying and calculating income, assets, and debts for DTI ratios under Appendix Q for non-W-2 wage earners,” the letter states.
In addition, the coalition’s letter states that lending outside the patch and the Federal Housing Administration channel has been limited, due to having to comply with the DTI cap. The coalition writes that the GSE patch has provided the regulatory certainty that is far more attractive to lenders.
Eliminating the DTI requirements, the letter continues, is “the best way to enable fair market competition across all lending channels while also ensuring that these creditworthy individuals can be served in a safe and sound manner under the existing ATR-QM framework.”
The GSE patch expanded the definition of qualified mortgages to include loans eligible for purchase or guarantee by the GSEs. In most cases these loans are granted a safe harbor from legal liability in connection with the ATR requirements.
Earlier this year, CFPB released an assessment of its ATR/QM Rule and found that GSE QM loans represent a “large and persistent” share of originations in the conforming mortgage market. Furthermore, creditors generally offered a Temporary GSE QM loan even when a General QM loan could be originated.
In its ANPR, CFPB stated that it does not intend to make the GSE patch permanent.
The coalition wrote: “The Bureau has a unique opportunity to modify the ATR/QM rule to meet the needs of a changing housing market. Elimination of the DTI requirement for prime and near-prime loans would preserve access to sustainable credit for the new generation of first-time homebuyers in a safe and sustainable way and in accordance with the fundamental ATR requirements.”
“Under the coalition proposal, private capital providers, mortgage insurers, and lenders will have the opportunity to develop better risk analytics and models, in accordance with fair lending laws, than are possible under the constraints of the GSE Patch or Appendix Q, so long as those underwriting criteria fully satisfy ATR and QM requirements.”
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
