Confusion over CFPB underwriting rule persists


Confusion is building in the mortgage market over conflicting deadlines for loans guaranteed by Fannie Mae and Freddie Mac to comply with the qualified mortgage standard.

Dave Uejio, Acting Director of the Consumer Financial Protection Bureau Last week announced a delay in the mandatory compliance with a Revised QM rules until October 2022, and that loans guaranteed by government-sponsored companies will remain exempt until then.

But that is in direct conflict with a January agreement between the Federal Housing Finance Agency and the Treasury Department governing the guardianships of Fannie and Freddie. The pact stipulates that the exemption – known as the GSE “patch” – will end in July, forcing Fannie and Freddie to start buying only QM loans.

“It’s a very messy and surprising situation,” said Stephen Ornstein, partner at Alston & Bird.

the QM The underwriting rule created after the 2008 financial crisis set parameters defining loans as safe. It was overhauled last year by the CFPB, which replaced a 43% debt-to-income limit with a price-based threshold as the key factor determining loan compliance. Lenders using these criteria are protected from any legal liability.

But Uejio’s decision threw the market into further turmoil. The GSE patch has allowed all mortgages backed by Fannie and Freddie to achieve QM status over the past seven years, even those with high DTIs.

Many lenders, advocates and policymakers see the CFPB’s decision as a precursor to the agency’s new review of the quality management framework finalized last year under former CFPB director Kathy Kraninger, despite two years rule-making and public comment.

“It was there, in our sights; we could finally taste it and then this proposal for reconsideration by the acting director challenged the way to proceed,” said Meg Burns, executive vice president of Housing. Policy Council. “What they really did was create uncertainty.”

Many lenders and advocates have sided with Kraninger QM rule which set the standard based on the pricing of a loan, capped at 150 basis points above the prime rate, rather than the 43% DTI limit. A coalition of stakeholders had been pushing for years for what they saw as a more efficient underwriting standard that would divert the market away from the primarily originator loans that GSEs would allow.

The new extension of the GSE patch by the CFPB means that Fannie and Freddie would effectively remain the arbiters of underwriting standards. Many believe this will stifle the return of the private secondary market.

“Industry and consumer advocates were on the same page because we recognized that with the new QM rule, we might finally have the opportunity to innovate to reach the underserved population,” Burns said. .

The Mortgage Bankers Association and lenders who issue non-QM loans want Fannie and Freddie to wean off the GSE patch to allow private lenders to pick up the slack. Although non-QM lending came to a screeching halt during the pandemic, the private market rebounded dramatically in the first quarter on the back of still-low interest rates and increased competition.

“There remains a strong and rebuilding market for non-agency mortgage-backed securities,” said Richard Gottlieb, partner at Manatt, Phelps & Phillips. “For QM lenders, the delay will be problematic without further action.”

The overhaul of the QM last year came after a five-year retrospective review in which the CFPB’s own research found that the GSE fix, the 43% DTI limit and a set of underwriting criteria hated by lenders, known as Annex Qweren’t working.

What makes the situation even more uncertain is the July 1 deadline established in the FHFA agreement for the end of the GSE patch. If that deadline is met, Ornstein said, lenders will be able to issue QM loans under the revised pricing standard or under the old QM rules, “but only with respect to underwriting under Schedule Q.” .

“In the absence of a reversal of the GSE [and FHFA Director Mark Calabria]after July 1, loans taken out under the QM Patch can no longer be purchased by Fannie Mae and Freddie Mac, and therefore cannot be QM,” Ornstein said.

The mortgage industry and consumer advocates have long chafed at underwriting restrictions, arguing that they exclude minority borrowers. Many believe that flexible use of technology and appropriate industry-established best practices would allow more borrowers, especially black and Hispanic homeowners, to qualify for home loans.

“A key benefit of the new QM rule is that it’s designed to open up underwriting to reach more black and Hispanic borrowers,” Burns said. “The fact that the CFPB may reconsider the new rule means that companies that were considering investing in the modeling work and risk analysis needed to set up new underwriting, new products, new practices, must now determine if it makes sense, depending on whether the final rule will be permanent or not.

Others suspect the CFPB might consider scrapping the QM rule altogether and starting new regulation or returning to the 43% DTI limit, a standard that never fully came into effect due to the GSE patch. Although the CFPB delay ostensibly gives lenders an additional 15 months to issue high DTI loans under the GSE patch as well as loans that meet a price-based threshold, beginning July 1, the FHFA will use the definition revised from QM.

Although GSEs can still buy many of the same mortgages they would have bought under the “GSE patch”, experts say the conflicting timelines are confusing the mortgage market.

In a statement announcing the postponement of the effective date of the new QM rule, the CFPB noted that the GSE fix may become difficult for lenders to use after July 1.

“Availability of the GSE patch after July 1, 2021 may be limited by recent revisions to preferred stock purchase agreements entered into by the Treasury Department and the Federal Housing Finance Agency,” the CFPB said in a statement. Press release.

The PSPA agreements dictate government ownership of the GSEs, which were placed in trusteeship in 2008.

The changes to equity agreements should not impact a wide range of lenders, as Fannie and Freddie will still be able to buy loans with high debt-to-income ratios, as long as they meet the new QM standard. But the other restrictions of the PSPAs could limit the amount of “riskier” mortgages GSEs can purchase what would have qualified as QM under the fix or new rule.

PSPAs have limited purchases of high-risk single-family mortgages by GSEs to 6% of their total portfolio and high-risk refinances to 3%. Under the new agreements, a loan is considered high risk if two of the following conditions apply: it represents more than 90% of the value of a home, the borrower’s DTI is greater than 45%, or if the borrower has a FICO score below 680.

The Community Home Lenders Association, a professional group of independent mortgage bankers, questioned the changes. In an April 22 letter to Fannie and Freddie, the group said some lenders were now receiving “cautionary” notices when servicing loans through GSEs’ automated underwriting engines, even when the borrower’s credit, loan conditions and financial capacity remain the same.

“We see no evidence that tightening the credit box is justified at this time by underlying lending risk, particularly in light of the continued profitability of GSEs,” the CHLA said.

While the FHFA cannot change these restrictions on its own, the Treasury Department could suspend changes to the PSPA or prevent GSEs from complying with them. The Treasury does not need FHFA approval to act since it is the majority shareholder of the GSEs.

The Mortgage Bankers Association and the American Bankers Association urged the CFPB not to extend the GSE patch by delaying the implementation of the final QM rule.

Mortgage lenders have held calls to discuss the issue, with some suggesting they will continue to use the GSE patch and monitor the CFPB’s delay of the QM compliance date, while others simply plan not to sell any GSE loans.

“Lenders can comply with the FHFA, but that destroys the argument of CFPB’s optionality. So it’s a very tricky situation,” Ornstein said. “You take away the near certainty of the fix and the automated underwriting, and now the lenders have the pricing [threshold]to consider.”


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