On July 25, the Consumer Financial Protection Bureau released an Advance Notice of Proposed Rulemaking (“ANPR”) asking for the mortgage industry’s opinion on the scheduled expiration of a provision in its Ability to Repay/Qualified Mortgage Rule (“Rule”), commonly known as the “QM patch.” The QM patch allows certain mortgage loans that are eligible for purchase or guarantee by Fannie Mae and Freddie Mac (“GSEs”) to qualify as a Qualified Mortgage (“QM”) loan under the Rule. The QM patch is scheduled to expire by January 10, 2021.

To encourage lenders to originate loans that comply with the QM loan standards, the Rule gives QM loans safe harbor from legal liabilities associated with not complying with the Rule. Also, to help avoid restrictions in lending behaviors as the industry became familiar with the Rule, the Bureau created the QM patch. It allows lenders to receive the safe harbor protection without meeting the QM loan’s 43 percent Debt-to-Income (“DTI”) limit. It also allows lenders to use the GSEs’ standards for verifying and calculating income instead of the QM loans standards.

Despite the Bureau’s original expectation that lenders’ use of the QM patch would decrease with time, it has remained a “large and persistent” part of “originations in the conforming segment of the mortgage market.” By the Bureau’s estimates, close to a million GSE-purchased or -guaranteed loans met the QM patch standards but did not meet the QM loan standards due to having DTIs greater than 43 percent. This accounted for 16 percent of all closed-end first lien residential mortgages originated in 2018. While a significant figure, this estimate likely fails to fully represent lenders’ sizable reliance on the QM patch. First, the Bureau’s estimate did not account for QM patch loans purchased or guaranteed by the GSEs that did not meet QM loan standards for reasons other than the DTI limit. Second, the Bureau’s estimate did not account for loans that did not meet the QM loan standards for any reason but were sold to non-GSE entities as QM patch loans.

While conceding it may provide a short extension to help the market transition away from the QM patch, the Bureau appears very intent on letting the QM patch expire. The Bureau believes that making the QM patch permanent, “could stifle innovation and the development of competitive private-sector approaches to underwriting.”  It further believes the QM patch “may be contributing to the continuing anemic state of the private mortgage-backed securities market.”

Considering the significant number of loans, and originating lenders, that would be impacted by expiration of the QM patch, the Bureau’s ANPR asks for industry feedback on potential changes to the QM loan standards to compensate for the QM patch expiring. Some include:

  • Replacing the DTI limit or creating alternatives to the DTI limit;
  • Either increasing or decreasing the DTI limit from 43 percent or creating a set of compensating criteria that would permit a lender to exceed 43 percent; and
  • Updating the standards used by lenders to calculate and verify debt income.

The Bureau will accept comments on the ANPR until September 16, 2019. Considering how almost any change to the QM patch will significantly impact the mortgage lending landscape, Troutman Sanders strongly encourages industry participants to assess how the QM patch’s expiration will impact their business models and to use that assessment to submit comments to the Bureau. Troutman Sanders attorneys can assist you in making these assessments and in preparing any comments you may wish to provide to the Bureau.