The U.S. Department of Treasury recently issued the long-awaited Housing Reform Plan, and among various topics the Plan addresses the temporary qualified mortgage under the Regulation Z ability-to-repay rule for loans that are eligible for sale to Fannie Mae or Freddie Mac (the GSEs). The Department concurs with the position of the CFPB, set forth in its outstanding advance notice of proposed rulemaking on the ability-to-repay rule, that the temporary qualified mortgage, often referred to as the GSE patch, should expire as scheduled on January 10, 2021, or after a short extension of the sunset date.
In supporting the expiration of the GSE patch, the Department states:
- The patch gives the GSEs a competitive advantage over portfolio lenders and other market participants to the extent that mortgage lenders face lower risk under the ability to repay rule for underwriting GSE-eligible loans, particularly for loans with debt-to-income (DTI) ratios above the 43% cap of the standard qualified mortgage.
- The eligibility criteria of the GSEs include requirements unrelated to the borrower’s ability to repay, such as the maximum loan limits, which preclude lenders from relying on the patch for jumbo loans.
- The patch gives the GSEs a quasi-regulatory role in defining ability-to-repay requirements that “while arguably appropriate on a temporary basis when the GSEs were in conservatorship, would be inappropriate if continued on a permanent basis or after the end of the GSE’s conservatorships.”
The Department also addresses Appendix Q to Regulation Z, which sets forth guidance on the determination of income and debt for purposes of the strict 43% DTI cap under the standard qualified mortgage. The Department echoes mortgage industry concerns that Appendix Q lacks sufficient clarity and detail, and does not sufficiently address self-employed borrowers or borrowers with non-traditional sources of income. The Department addresses potential revisions to Appendix Q, but then states that “there is reason to doubt whether even a substantially revised Appendix Q could address most of the diverse income and debt verification scenarios while also providing mortgage lenders with the requisite bright line safe harbor. Enforcement proceedings or litigation challenging whether, in the case of any particular mortgage loan, the mortgage lender verified the borrower’s income and debt in compliance with the revised Appendix Q would inevitably raise fact-intensive inquiries that would themselves entail lengthy and expensive enforcement or judicial proceedings. The inevitability of these proceedings to simply determine the applicability of the safe harbor would in effect render the safe harbor essentially meaningless.”
Based on these concerns, the Department recommends that Congress and the CFPB consider alternative approaches to establishing bright line safe harbors for ability-to-repay rule compliance that do not rely on prescriptive underwriting requirements. One approach offered by the Department would be to conclusively deem a loan to be a qualified mortgage if it has financing costs below a specified threshold. The Department cites the Regulation Z high-cost loan provisions as precedent for this approach. The high-cost loan provisions provide for additional borrower protections and requirements for loans that meet the annual percentage rate, points and fees or prepayment fee triggers of the provisions. Another approach, which the Department notes could be in addition to the first approach, would be for a mortgage loan to conclusively become a qualified mortgage after a specified seasoning period.
The Department also states that after the ability-to-repay rule is revised by the CFPB, the Federal Housing Finance Administration should revisit the determination of which single-family mortgage loans should be eligible for acquisition by the GSEs.