MBA Asks CFPB to Extend GSE ‘Patch’ Sunset

The Mortgage Bankers Association, in a comment letter yesterday to the Consumer Financial Protection Bureau, asked the Bureau to extend the temporary GSE Qualified Mortgage loan definition, also known as the GSE “Patch,” for an additional six months following the effective date for the revised general QM parameters.

Upon the conclusion of this overlap period, MBA said, the GSE Patch should be allowed to expire. MBA also recommends additional enhancements to the QM framework regarding the role of the GSE conservatorships, the definition of a loan “application,” and the ability to cure QM violations related to points and fees.

The GSE Patch, created as part of the Dodd-Frank’s amending the Truth in Lending Act, is scheduled to expire in January 2021 or when Fannie Mae and Freddie Mac exit conservatorship, whichever comes first.

MBA has long-supported the GSE Patch, noting it plays a crucial role in the mortgage market. By providing an exception to the General QM loan definition’s strict 43 percent debt-to-income (DTI) ratio threshold and rigid income and debt verification criteria, the GSE Patch facilitates access to affordable mortgage credit for credit-worthy borrowers who fall outside the requirements of the General QM definition.

The GSE Patch’s importance was confirmed in the Bureau’s assessment report on the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule), which estimated that nearly one out of every six loans originated in 2018, or 957,000 loans representing a total of $260 billion in originations, benefited from the GSE Patch. Absent a suitable replacement for the GSE Patch, access to affordable mortgage credit for borrowers with DTI ratios greater than 43 percent and borrowers without Appendix Q required documentation (such as those reliant on self-employment, “gig” or irregular employment, or rental income) would be curtailed significantly and be more expensive.

In the letter to CFPB Director Kathy Kraninger, MBA said it supports the Bureau’s efforts to extend the GSE Patch to the effective date of a final rule amending the General QM loan definition or the date on which the GSEs exit conservatorship.

“MBA strongly supports this objective and urges the Bureau to prevent any gap between the expiration of the GSE Patch and the implementation of its replacement. With that shared goal in mind, we believe this can best be achieved with modest modifications to the Bureau’s proposal to minimize any market disruptions,” wrote MBA President and CEO Robert Broeksmit, CMB. “Extending the GSE Patch to six months after the effective date of the new General QM rule would more thoroughly ensure the continued availability of affordable mortgage credit, eliminate market uncertainty and reduce unnecessary implementation burdens.”

MBA insisted the GSE Patch should not be extended indefinitely. “The GSE Patch served to ensure stability in the mortgage market, as it was intended to do, in the years following its inception,” the letter said. “The GSE Patch was not, however, intended to become a permanent feature of the housing finance system. While necessary over the past several years, the GSE Patch also provides significant advantages to the GSEs by effectively codifying their underwriting parameters into the QM definition. This outcome produces excessive reliance on the GSEs while stifling innovation by other market participants. An improved QM framework would feature transparent parameters that apply evenly across the market and are not based on a particular set of investor or guarantor guidelines. As such, an extension of the GSE Patch should be viewed as a bridge to this improved QM framework – not a long-term feature.”

Nor should the GSE Patch should be tied to the end of the GSE conservatorships, MBA said. “While the timeline for the General QM rulemaking features some uncertainty, there are reasonable bounds on this timeline and market participants can anticipate the likely window of effective dates with a reasonable degree of confidence,” the letter said.

However, MBA cited concerns regarding the Bureau’s proposed rule, warning of a potential gap in QM coverage that is the result of the Bureau’s own proposals.

“As proposed, the expiration of the GSE Patch leaves open the possibility that borrowers currently served by the GSE Patch (e.g., borrowers with higher DTI ratios, non-W-2 wage earners, etc.) would be unable to obtain QM loans for a period,” MBA said.  

Additionally, the proposed timeline also leaves open the possibility that the new General QM rule will come into effect near the March 1, 2021 mandatory use date for the redesigned Uniform Residential Loan Application. “Transitioning to the new URLA represents a tremendous implementation challenge for mortgage lenders,” MBA said. “The overhauled form is significantly more detailed than the previous version, with more than twice as many data fields, requiring extensive process and system changes affecting each step of the mortgage origination process.”

MBA also noted under the proposal, two events could trigger the expiration of the GSE Patch: the effective date of the new General QM rule or the GSEs exiting conservatorship.

“MBA supports efforts to eliminate the GSE Patch and replace it with a more consistent, market-wide QM definition that does not confer special advantages on the GSEs,” MBA said. “In this time of great uncertainty, however, we believe the most reasonable approach is simply to eliminate the reliance on the potential end of the conservatorships as a trigger for the end of the GSE Patch.”

Together, MBA added the potential for severe market disruption and the safeguards against unsafe or unsound practices “underscore the need to remove the GSEs’ potential exit from conservatorship as a trigger for the expiration of the GSE Patch.”

MBA offers a simple solution to address these issues. “The Bureau should set the GSE Patch expiration at a date six months after the effective date of the new General QM rule, which in turn should become effective six months after its publication in the Federal Register,” MBA said. “By extending the GSE Patch beyond the date the new General QM rule becomes effective, the Bureau would minimize the number of loans affected by the gap in QM coverage for borrowers who apply before, but close after, the new rule’s effective date. Further, extending the GSE Patch to six months after the effective date of the new General QM rule would better ensure that implementation does not overlap with the market’s efforts to implement the new URLA. Finally, removing the GSEs’ potential exit from conservatorship as a trigger for the GSE Patch’s expiration would eliminate market uncertainty over the possibility for a gap in QM coverage should the GSEs exit conservatorship before the new General QM rule comes into effect.”