Housing News

CFPB Extends QM Patch Indefinitely

The piece of federal lending law that allows borrowers whose mortgages are sold to Fannie Mae and Freddie Mac to have a higher debt-to-income ratio than other types of qualified mortgages was all set to expire on Jan. 10, 2021.

But that's not the case anymore.

The Consumer Financial Protection Bureau announced last week that it is indefinitely extending the so-called "QM Patch," which allows loans that exceed the 43% DTI ratio threshold to be purchased by Fannie and Freddie and still enjoy QM status.

Under the Ability to Repay/Qualified Mortgage rules, lenders are required to verify that a borrower will be able to repay the loan, including reviewing the borrower's debts and income. Those rules stipulate that a borrower's DTI ratio (the portion of their income that goes toward their debt) cannot exceed 43%.

Fannie and Freddie, however, are permitted to purchase loans with DTI ratios that exceed 43% under a special category of QM known as the QM Patch or the GSE Patch.

The presence of the QM Patch allowed the GSEs to expand their business because they did not have to abide by the same lending rules as private capital did.

But, in recent years, the CFPB has been working to scale back the use of DTI as a metric for determining if a borrower can repay their mortgage.

According to the CFPB, that process is still underway, but the agency said recently that it feels that credit availability may be negatively affected by the elimination of the QM Patch before the new QM rules being announced.

"The Bureau is issuing this final rule because it is concerned about the likely effects on the availability and cost of credit if the Temporary GSE QM loan definition were to expire before final amendments to the General QM loan definition take effect," the CFPB said.

According to the CFPB, loans that fall under the QM Patch umbrella make up a "large and persistent share of mortgage originations" every year.

To that point, the CFPB estimates that more than 950,000 mortgages per year would be in some form of jeopardy if the QM Patch is eliminated as things stand now.

"Absent regulatory action the Bureau estimates that approximately 957,000 mortgage loans would be affected by the expiration of the GSE Patch," the CFPB said. "The Bureau estimates that, after the GSE Patch expires, some of these loans would either not be made or would be made but at a higher price."

It should be noted that while the CFPB is delaying the "sunset" of the QM Patch, the agency still plans to eliminate it. According to the CFPB, the QM Patch will expire at one of two times: either when the GSEs exit federal conservatorship or when the new QM rule takes effect.

As for when either of these things are going to happen, there is no firm answer. The CFPB said last week that it is "currently developing" a final rule changing the definition of a QM loan and is "planning to issue it at a later date."

Meanwhile, the GSEs are still in conservatorship, and despite recent moves that pushed Fannie and Freddie closer to an exit from government conservatorship, a true exit is still an uncertain proposition.

As a result, the QM Patch will likely be sticking around for some time.