The Honorable Kathleen L. Kraninger
Director
Consumer Financial Protection
Bureau
1700 G Street NW
Washington, DC 20552
Dear Director Kraninger:
The undersigned organizations are writing in response to the Consumer Financial
Protection Bureau’s (Bureau) rulemaking regarding the definition of a Qualified Mortgage
(QM). Our organizations represent diverse housing finance stakeholders, including
consumer groups, lenders, and mortgage insurers, and we appreciate the opportunity to
provide our joint perspectives in addition to our individual comment letters that were
submitted in response to the Bureau’s Advance Notice of Proposed Rulemaking (ANPR). The
Ability-to-Repay (ATR) rule in the Dodd-Frank Wall Street Reform and Consumer Protection
Act is one of the most important consumer safeguards in the legislation, and the
Bureau’s regulations to promulgate and execute it will directly affect access to safe
and affordable mortgage finance credit. We all agree that maintaining access to
affordable and sustainable mortgage credit should be a key objective of the Bureau’s
revised rulemaking.
We appreciate the Bureau’s thoughtful approach to assessing and implementing potential changes to the QM definition. This letter contains our joint recommendation that the Bureau implement a QM definition that relies on measurable underwriting thresholds and the use of compensating factors for higher risk mortgages rather than either a pricing-based QM definition that uses the spread between the annual percentage rate (APR) and the Average Prime Offer Rate (APOR) as a proxy for underwriting requirements (the “APOR approach”) or a hard cut-off at either 43% or 45% DTI.
Specifically, this coalition strongly supports:
- The continued use of a modified debt-to-income (DTI) ratio in conjunction with certain compensating factors, which could be used in the underwriting process and would provide guidance to creditors on their use; and
- Significant changes to Appendix Q to rely on more flexible and dynamic standards for calculating income and debt.
Compensating Factors Would Enable Prudent Underwriting and Affordable Access to Credit
The Bureau should establish a set of transparent mitigating underwriting criteria –
“compensating factors” – for mortgages with DTI ratios above 45% and up to 50%. While
DTI is not the most predictive factor in assessing a borrower’s ability to repay, it
can, in concert with compensating factors, function as a bright line that mitigates
undue risk in the conventional market while continuing to provide affordable access to
mortgage finance for creditworthy borrowers. Moreover, DTI is a widely and commonly used
metric when considering a borrower’s ability to repay in mortgage loan underwriting and
is the standard in the current rule issued in 2013. While a higher DTI may indicate
increased stress for the borrower and a consequent strain on ability to repay, the
presence of other positive credit characteristics – such as liquid reserves, limited
payment shock, and/or a down payment from the borrower’s own funds – can mitigate the
heightened risk and limit the risk layering that drives loan non-performance. In fact,
the automated underwriting systems (AUSs) used by Fannie Mae and Freddie Mac (the GSEs),
as well as proprietary AUSs used by primary market lenders, have always used
compensating factors to assess borrowers’ ATR, and such a multifactor approach has long
been the standard for manual underwriting throughout the industry.
The efficacy of using compensating factors for high-DTI mortgages is demonstrated by the
track record of loans acquired by the GSEs. Rather than introducing undue risk to the
housing finance system, these loans have performed well. In fact, high-DTI loans (with
ratios between 45.1% and 50%) underwritten using compensating factors outperform loans
with lower DTI ratios (between 35.01% and 45%). The lower delinquency rates on the
higher DTI loans are almost certainly due to the presence of appropriate compensating
factors in the GSEs’ AUSs.
The table below reflects one specific set of
compensating factors we believe are appropriate for borrowers with DTIs above 45% and up
to 50% that could be tailored for the revised rule. These recommendations are based on:
(1) internal analysis and efforts to “back into” the compensating factors currently used
by the GSEs to avoid a dramatic shift in the market; and (2) known factors that
significantly impact borrowers’ ATR. This is by no means an exhaustive list and we
welcome further discussion about compensating factors and their respective
predictiveness. The Bureau’s final rule on the QM definition could authorize the GSEs,
Federal Housing Finance Agency (FHFA), or an independent standard-setting entity to
formulate a transparent list of compensating factors and should make the underlying data
and analysis available to the public for ongoing review and assessment to ensure that
dynamic compensating factors can be updated to reflect changes in the market and
mortgage credit risk environment.
Using an APOR-Only Approach Does Not Meet the Legislative Intent of the Statute
and Does Not Appropriately Measure Ability to Repay
The APOR approach is premised on the faulty idea that pricing fully captures credit risk
and that, in turn, credit risk is a reasonable marker for ability to repay. In the
mortgage industry, a loan’s pricing reflects a number of factors outside of an
individual borrower’s credit profile, including a lender’s balance sheet capacity,
prepayment speeds, the value of mortgage servicing rights, business goals, and broader
economic considerations. With regard to risk, pricing does consider down payment and
credit score, but often fails to capture risk-mitigating characteristics such as
borrower reserves, DTI ratios, and payment shock.
Any QM definition that relies solely on the statutory ATR requirements or the price of a
loan will be seriously flawed. ATR requirements are too broad and do not adequately
reflect a borrower’s ability to repay. On the other hand, a loan’s price can be
manipulated to gain QM safe-harbor status.
There are several important consumer protection concerns at issue. First, loans made
within the QM safe harbor are not, practically speaking, subject to underwriting
thresholds/requirements for determining ATR because if a loan meets the product feature
requirements along with any other adopted QM standards, no adjudicative body or
regulator can “look under the hood” and examine the fuller underwriting process.
Second, if the only underwriting protection is APOR, mortgages could be made to
financially vulnerable borrowers at a price just below the safe harbor threshold even
though the borrowers’ financial/credit profiles might otherwise call for greater
underwriting analysis consideration and ATR protections. This mispricing of risk helped
set the 2008 financial crisis in motion.
Third, using this approach assumes creditors are able to uniformly and accurately price
risk of repayment, an assumption that was disproven in the financial crisis and ignores
market and economic pressures that can drive underpricing of risk.
Fourth, an APOR approach could increase risk within the mortgage finance system as APOR
is a trailing indicator of risk and can be procyclical. Therefore, periods of sharply
rising rates could cause temporary suspensions in lending that could impact prime loans
with higher risk attributes. Additionally, during periods of low rates and loose credit,
borrowers run the risk of being overextended.
An APOR Approach Could Make It Harder for Creditworthy Low Down Payment and
Minority Borrowers to Obtain Mortgages
Moving from a DTI-based QM standard to an APOR approach could reduce the ability of low
down payment and minority borrowers to obtain conventional mortgages. For example, based
on 2018 Home Mortgage Disclosure Act (HMDA) data, $11-12 billion in GSE purchase
origination volume had loan-to-value (LTV) ratios of >80% and APRs with spreads in
excess of APOR + 150 basis points.6 Further, based on the same dataset, African American
and Hispanic borrowers were twice as likely as white borrowers to have mortgages with
APRs in excess of the APOR + 150 basis points safe harbor spread.7
Many qualified borrowers who are not able to obtain mortgages that meet an APOR standard
under a revised QM definition would be denied access to homeownership opportunities
while other qualified borrowers in this category would see their loan options reduced.
Some mortgages that would normally have been made in the conventional market would
gravitate towards the 100% taxpayer-backed FHA, an outcome that is inconsistent with the
Administration’s housing finance reform principles and objectives as articulated in the
September 2019 reports from the Department of the Treasury and the Department of Housing
and Urban Development.
____________________________________________
6 2018 HMDA Data, GSE Purchase Origination Data, and Genworth MI.
7 Id.
Regardless of the solution chosen, we urge that the transition period from the existing
GSE Patch to the new QM framework be sufficiently long to allow market participants
adequate time to plan for, and adjust to, new rules and underwriting standards. Any
transition to a new QM rule ought to be smooth and well thought-out. Otherwise it risks
regulatory uncertainty that might cause mortgage originators to retreat from lending to
creditworthy homebuying and refinancing borrowers.
Thank you again for the opportunity to share our collective perspectives on the Bureau’s
work regarding the QM definition. The expiration of the GSE Patch and what is developed
to replace it will have significant implications for consumers’ access to affordable and
sustainable mortgage finance credit. We hope to have a continued constructive dialogue
through a robust comment process to result in the best future standard and we welcome
the opportunity to serve as resources as the Bureau works toward a proposed, and then
final, rule.
Sincerely,
Consumer Federation of America
Community Home Lenders Association
The Community
Mortgage Lenders of America
Independent Community Bankers of America
National
Association of Federally-Insured Credit Unions
National Association of
REALTORS®
National Community Stabilization Trust
National Consumer Law Center (on
behalf of its low-income clients)
U.S. Mortgage Insurers
CC:
Andrew Duke
Brian Johnson
Mark McArdle
Kirsten Sutton
Thomas Pahl