Main Street Matters Blog

Into the weeds on the QM patch

Feb 04, 2020

By Ron Haynie



The debate over housing-finance reform often ends up deep in the weeds, but the esoteric details are often of the utmost importance to community banks. Recent developments in Washington bear that out, with seemingly arcane conversations between regulators and Congress posing risks to the future of the housing-finance system.

Consumer Financial Protection Bureau Director Kathy Kraninger recently told certain members of Congress that the bureau plans a short-term extension to a policy exempting Fannie Mae and Freddie Mac mortgage loans from parts of its Qualified Mortgage rule. The rule requires mortgage lenders to consider consumers’ ability to repay a mortgage loan before extending credit.

This policy — known as the QM or GSE "patch" — is scheduled to expire in January 2021. It provides QM status to loans purchased or guaranteed by the government-sponsored enterprises (Fannie and Freddie) even if they exceed the rule's 43 percent debt-to-income limit. At least 25 percent of the GSEs' loan purchases currently are covered by the patch.

ICBA opposes allowing the GSE patch to expire without making changes to the QM rule.

In a September 2019 comment letter, ICBA advocated a DTI range of 45-50 percent along with changes to Appendix Q that would allow lenders to use compensating factors when evaluating a borrower's ability to repay. Due to an ICBA-advocated provision of the S. 2155 regulatory relief law, community banks with assets below $10 billion are generally exempt from this requirement for mortgage loans they originate and retain in portfolio.

However, Kraninger indicated in her letter to Congress that the CFPB plans to revise its QM definition away from DTI ratios in favor of an approach based on pricing, which larger mortgage lenders support but ICBA strongly opposes.

DTI ratios function as a bright line that mitigates undue risk in the conventional mortgage market. Transitioning away from this widely used metric—which Kraninger said her agency could begin early next year—threatens to reintroduce the kinds of risks in the mortgage market that contributed to the Wall Street financial crisis of 2008. Further, it would effectively nullify the QM rule's exemptions for community bank portfolio loans.

In a recent joint letter and in its September comment letter, ICBA said the DTI ratio requirement, while not a perfect metric and combined with measurable compensating factors, enables prudent underwriting, appropriately measures ability to repay, and supports low-income and minority borrowers.

ICBA will continue working with policymakers to extend the GSE "patch" without implementing a pricing-based QM definition that will favor the largest mortgage lenders and introduce unnecessary risk in the mortgage market.

Further, ICBA will urge the CFPB not to take any actions that could disrupt the mortgage market and unnecessarily reduce access to credit for creditworthy borrowers.

These debates in Washington often involve complex issues, but the ICBA and community bank commitment to safety and soundness remains fairly simple—and fundamental.

Ron Haynie is ICBA senior vice president of mortgage finance policy.