Contact Editor

Consumer Financial Protection Bureau Issues Two Proposed Rules

by Jessica Wilhelmy | Jun 24, 2020

Consumer Financial Protection Bureau Issues Two Proposed Rules
Addresses Debt-to-Income Ratio, QM Patch

On June 22nd, the Consumer Financial Protection Bureau (CFPB) issued two notices of proposed rulemaking to address Qualified Mortgage issues. The Qualified Mortgage rule was first established after the 2008 financial crisis with a focus on the ability of a borrower to repay, specifically on their debt-to-income (DTI) ratio. To qualify under the current QM rule the borrower’s DTI ratio must be 43 percent or less. Loans sold to GSEs such as Fannie Mae and Freddie Mac are not bound to the 43% DTI ratio and they may sell loans to consumers that exceed the threshold; this exception is commonly known as the QM “patch”.

The first proposed rulemaking addresses QM by replacing the DTI ratio, determined by the QM definition in Regulation Z, with a price-based threshold. The price-based threshold will measure a loan’s annual percentage rate to the average offer rate of a comparable transaction to more accurately determine a consumer’s ability to repay a mortgage loan. Traditional factors such as consumer’s income and debt will still be taken into account. Further, the CFPB is proposing a price threshold increase for most loans including smaller loans, which is especially important for minority and underserved consumers. This change is believed to allow for increased competition in the mortgage market while preserving the consumer access to mortgage loans.

The second proposed rulemaking will delay the expiration date of the QM “patch” for the GSEs to ensure a smooth transition. The rulemaking states the QM patch will expire upon the effective date of a final rule regarding the first notice’s proposed rule change.

To read the full announcement from CFPB, click here: