The Mortgage Bankers Association (MBA) offered its support for a Consumer Financial Protection Bureau (CFPB) proposal to change the way a qualified mortgage (QM) is determined.
The trade association told the bureau that it backed both the idea to create a standard based on the spread of loan price against the average prime offer rate (APOR), as well as the proposal to eliminate debt-to-income (DTI) as a standalone factor for QM eligibility.
“MBA appreciates the bureau’s thorough and considered approach to revising the QM framework,” MBA President and CEO Bob Broeksmit wrote in a comment letter to the regulator. “The shift to a price-based construct, along with the elimination of a stand-alone DTI ratio threshold and associated Appendix Q, will facilitate a more vibrant market in which consumers maintain strong access to credit as well as appropriate safeguards to ensure their ability to repay.”
The letter began by saying the General QM framework proposed around price was faithful to the goals of the Dodd-Frank Act’s creation of QM.
“Loan price, measured by comparing a loan’s APR to the APOR for a comparable transaction, is a strong indicator of a consumer’s ability to repay,” MBA stated. “The use of loan price, moreover, will maintain access to credit for borrowers currently served by the GSE Patch, while also providing opportunities to expand credit outreach to underserved market segments through responsible innovation. In this way, the bureau’s price-based QM standard strikes an appropriate balance between promoting access to credit and protecting consumers from unsustainable mortgages.”
By using a price-based method of determining QM, MBA said lenders would conduct a comprehensive assessment based on as much relevant information as can be gathered. Because the price-based determination includes most or all of the TILA factors in ability repay, the association said the process made for a much stronger proxy of borrower’s ability to repay than a standalone DTI could.
“Loan price is thus an appropriate basis for determining eligibility for QM status, as it is a holistic measure of a consumer’s ability to repay that closely reflects the statutory ATR factors,” the letter stated.
The change to price-based QM standards also could unlock innovation from the lending and underwriting side, MBA stated.
“In addition to preserving access to credit for borrowers currently served by the GSE Patch, the bureau’s proposal to base QM eligibility on loan price would create opportunities for lenders to expand access to credit through innovation in underwriting or efforts to reach populations that currently are underserved,” the letter stated. “Unlike the existing DTI ratio-based General QM definition, which requires strict adherence to the verification requirements of Appendix Q, the proposed price-based approach would accommodate innovation with respect to loan underwriting and verification.”
That could provide options for lenders to offer more QM loans to borrowers without W-2 income or limited credit history, with risk limited by the rate spread threshold.
“In other words, while lenders can deviate from traditional industry practices, they must do so in a fashion that the market is willing to accept at similar competitive pricing as loans that are generally understood to not be particularly risky,” the letter stated. “In this way, the capacity for innovation does not erode the pricing construct’s ATR protections.”
Among the areas in which MBA expressed concern with the proposal was the CFPB’s decision to require calculation of a DTI ratio in accordance with 12 CFR 1026.43(c)(7), saying that decision would be problematic and threatened to undermine the benefits of QM qualification.
“Put simply, this commentary provision might be read to state that any QM loan could be subject to an inquiry into or challenge based on the reasonableness or good faith of the creditor when determining the appropriate DTI ratio of a QM loan,” the letter stated. “This outcome would substantially impair the benefits of QM status to lenders and investors, introducing significant legal uncertainty into a regime meant to provide clear eligibility parameters.”
Should the CFPB decide that it needs to continue DTI calculations, MBA recommended that the commentary should be amended to make it clear that a lender must evidence that it derived a DTI ratio as part of the underwriting process to qualify for QM status.
“Under such a revision, the lender’s consideration of a DTI ratio would not be subject to an ambiguous reasonableness or good faith standard,” the letter stated. “This would avoid undoing the benefits of the proposed rule’s design by introducing the ATR standard into the QM construct, while also ensuring that a DTI ratio was produced.”
The rebuttable presumption standard currently contained in the definition of QM – for loans which do not meet full safe harbor status – should be eliminated for first-lien loans, MBA stated.
“To best achieve the bureau’s stated objective of balancing ‘the competing consumer protection and access to credit considerations’ associated with the QM construct, MBA recommends that the bureau increase the safe harbor threshold for first-lien transactions in the General QM definition to a rate spread of 200 basis points,” MBA stated. “In doing so, the bureau should eliminate the rebuttable presumption QM category for first-lien transactions altogether.
“Any increase in the safe harbor threshold must be undertaken in a manner that does not afford a conclusive presumption of ATR compliance to loans that do not warrant this presumption. The shift to a safe harbor threshold of 200 basis points does not trigger this concern. Recent loan performance data, for example, reveal only a modest increase in early delinquency rates in the population of loans with rate spreads between 150 and 200 basis points relative to loans with rate spreads just below 150 basis points.”