What's in store for the CFPB's Ability-to-Repay/Qualified Mortgage rule ("ATR/QM Rule")? The agency assessed the Rule (consisting of the January 2013 Final Rule and subsequent amendments) as required by the Dodd-Frank Act, and reviewed whether the rule is meeting its (and the agency's) objectives or creating unintended consequences. The CFPB sought public comment in May 2017 as it assessed the effectiveness of the ATR/QM Rule. The 2013 Ability-to-Repay and Qualified Mortgage Assessment Report ("Report") was made available on January 10, 2019.
The CFPB's Report likely does not indicate major changes for the ATR/QM rule writ large, but one area of interest is the Bureau's take on general QM and "GSE patch" loans, and comparison of the Rule's Appendix Q with Government Sponsored Entity (GSEs) guidelines. The Report also summarized the Bureau's findings regarding the development of a Non-QM market, and highlighted the way that the Rule's structure encourages innovation.
Appendix Q vs. GSE Underwriting Guidelines
The Report notes that commenters complained about the clarity and usability of Appendix Q. The Report draws high-level comparisons between Appendix Q and GSE guidelines, including the following notes:
- GSE guidelines are more detailed, allowing for a higher degree of specificity in addressing actual underwriting issues and outcomes. The Report notes that the GSE guidelines run over 100 pages, while Appendix Q is only 11 pages.
- GSE guidelines are flexible, and have been regularly adjusted and updated, whereas Appendix Q has remained static since 2013.
- Industry participants viewed the purchase or guarantee of loans by one of the GSEs as adding extra compliance certainty beyond that provided by the Temporary GSE QM.
Additionally, the Report highlights the fact that the GSEs have expanded allowable debt-to-income (DTI) ratios past those allowed under the ATR Rule's general QM. The general QM is capped at 43% DTI, while GSEs have expanded up to 50% DTI.
The Report states that a survey of lenders shows that underwriting for self-employed borrowers was one of the most frequently reported sources of difficulty in originating mortgages using Appendix Q. Survey respondents also reported Appendix Q difficulties with borrowers who have irregular income, or want to use asset depletion as income.
"Compliance Certainty" and the Non-QM Market
The Report explains that a primary barrier to increases in Non-QM lending is the so-called "ATR risk," described in the Report as the (actual or perceived) extra risks/costs arising from:
- risk of litigation by private parties asserting that the lender failed to assess ATR;
- cost of complying with documentation and verification requirements of the Rule (if different from the pre-Rule practice);
- additional cost of funds, due to a separate requirement, adopted by other federal agencies, that lenders retain extra capital to cover the risk associated with Non-QM loans; and
- additional cost of funds due to the cost of originating less liquid assets (Non-QM loans are not easily sold on the secondary market).
The CFPB's Report explains that "compliance certainty" issues have created a preference by investors and lenders for temporary GSE QMs over general QMs.
Innovation in Non-QM Mortgage Lending
The Report notes that Non-QM lending has, to date, focused on low-documentation applications (mostly for self-employed borrowers), but otherwise has had LTVs and DTIs similar to those of QM loans. However, the Report states that the Bureau expects innovation "at least in the Non-QM space," and that "[i]nnovation could also occur in the general QM space with respect to underwriting approaches that would be consistent with the general QM criteria." Here, the Report notes that the Rule does not tie its ATR/QM requirements to any particular underwriting standards, in an effort to encourage positive innovation.