A&B ABstract: A recent letter from Consumer Financial Protection Bureau (“CFPB”) Director Kathleen Kraninger provides clues about the potential future of the so-called “QM Patch.”
Discussion:
In a December 17, 2020 letter to Senator Mike Rounds (“Letter”), CFPB Director Kathleen Kraninger, revealed a number of interesting insights about the CFPB’s ongoing evaluation of the reformation of the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule, including the phase-out of the “QM Patch”.
Background:
The CFPB enacted the QM Patch as a temporary provision of the ATR/QM regulations promulgated pursuant to the Dodd-Frank Act. It exempts lenders from having to underwrite loans with debt-to-income ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a qualified mortgage and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.
On July 25, 2019, the CFPB issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch”, which is scheduled to expire no later than January 10, 2021. In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.
The Letter:
Based on public comments submitted in response to the ANPR, Director Kraninger indicated that the CFPB, in amending the definition of what constitutes a qualified mortgage, will issue a Notice of Proposed Rulemaking (“NPRM”) by no later than May 2020.
The Letter provides further detail on the NPRM. First, the CFPB will propose to eliminate the current 43% debt-to-income requirement and impose an alternative measure such as a pricing threshold (“i.e., the difference between the loan’s APR and the average prime offer rate for a comparable transaction”). Director Kraninger asserted that the pricing threshold would help facilitate the offering of “responsible, affordable mortgage credit”. Second, the CFPB will propose to extend the expiration of the QM Patch for a short period pending the effective date of the proposed alternative.
Perhaps even more significantly, Director Kraninger indicated that the CFPB in a separate NPRM may adopt a new “seasoning” mechanism that would confer QM Safe Harbor treatment to certain loans that have a history of timely payments. This mechanism would greatly facilitate the sale and securitization of non-QM loans that may have missed being classified as QM due to some blemish prior to consummation.
Takeaway:
Director Kraninger’s brief comments in the Letter indicate that the CFPB is determined to eliminate the QM Patch after a short extended transition period. Further, the CFPB has demonstrated its commitment to reforming the definition of a qualified mortgage in a manner that will enhance credit availability to a broader spectrum of the credit markets—or so it is thought—and give a lifeline to seasoned highly performing loans that have previously been excluded from the gold standard QM Safe Harbor category. The credit markets anxiously await the promulgation of these anticipated proposed rulemakings.
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