CFPB extends GSE patch until QM definition is amended

The Consumer Financial Protection Bureau (CFPB) has issued a final rule extending the  qualified mortgage (QM) patch for Fannie Mae and Freddie Mac until a replacement for the patch is established.

Specifically, the rule extends the current patch until the mandatory compliance date of a final rule amending the General Qualified Mortgage loan definition within the Truth in Lending Act. Without an extension, the patch would have expired on Jan. 10, 2021, and previous signals from the CFPB and Federal Housing Finance Agency had pointed toward letting the patch sunset.

The patch’s extension was first hinted at by CFPB director Kathleen Kraninger during a discussion at the Mortgage Bankers Association’s virtual annual convention and expo. Kraninger called the extension “indefinite,” stressing that the patch will remain in place until its successor is eventually enacted.

“We are operating under the rubric of the law,” Kraninger told MBA members. “The congressionally mandated standards remain in place and we want individual lenders to have the flexibility to calculate the standards that best suit their models.”

Kraninger, however, was resolute in saying that the CFPB is seeking “clear rules” and that the bureau wants everyone to follow the same rules.

The CFPB already issued a proposal to amend the QM definition on June 22 of this year. In place of the patch, that proposal called for the replacement of the QM definition’s 43% debt-to-income (DTI) threshold with a “price-based approach.” A loan would meet the general QM definition only if its annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable transaction by less than two percentage points as of the date the interest rate is set. Higher thresholds would be provided for mortgages with smaller loan amounts.

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Kraninger said the CFPB still believes a pricing threshold offers a more realistic evaluation of a borrower’s ability to repay. She added that applying the QM definition’s current DTI threshold rigidly, without a patch “as a valve to let off some of that steam,” would cut off homeownership opportunities for many potential buyers — hence the CFPB’s diligence in crafting a new solution.

The bureau, she indicated, is currently reviewing the comments it received when it initially made the proposal and is working toward the issuance of a final rule at a later date based that feedback.

“We are moving smartly but expeditiously to pull this together and enable that smooth transition,” Kraninger said.

In announcing the final rule extending the GSE patch, the CFPB also was clear that it is not amending the provision that states that the patch would expire if Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs), exit conservatorship.

Observers applauded the CFPB’s action as decisive during a time of persistent financial uncertainty, taking one pressure point off the table for the time being as the U.S. economy continues to recover from the ongoing COVID-19 pandemic.

“The CFPB has acted very responsibly by extending the so-called ‘GSE patch’ from Jan. 10, 2021, to the date the bureau finalizes its proposals to modify the ‘qualified mortgage’ or ‘QM’ provisions of the Truth in Lending Act and Regulation Z,” said Joseph Lynyak III, a partner at financial regulatory law firm Dorsey & Whitney.

“Whether the CFPB will modify its proposed regulations following the upcoming elections are unclear. However, today’s rule establishes stability in the residential loan origination market well beyond the early part of next year.”


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