Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z), 37155-37162 [2019-16298]
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Federal Register / Vol. 84, No. 147 / Wednesday, July 31, 2019 / Proposed Rules
any law enforcement investigation,
issue a public report on the matter,
redacting any material under seal. Id.
The Commission seeks comments on
the Petition. The public may inspect the
Petition on the Commission’s website at
https://sers.fec.gov/fosers/, or in the
Commission’s Public Records Office,
1050 First Street NE, 12th Floor,
Washington, DC 20463, Monday
through Friday, from 9 a.m. to 5 p.m.
The Commission will not consider the
Petition’s merits until after the comment
period closes. If the Commission
decides that the Petition has merit, it
may begin a rulemaking proceeding.
The Commission will announce any
action that it takes in the Federal
Register.
On behalf of the Commission.
Dated: July 25, 2019.
Ellen L. Weintraub,
Chair, Federal Election Commission.
[FR Doc. 2019–16240 Filed 7–30–19; 8:45 am]
BILLING CODE 6715–01–P
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1026
[Docket No. CFPB–2019–0039]
RIN 3170–AA98
Qualified Mortgage Definition Under
the Truth in Lending Act (Regulation Z)
Bureau of Consumer Financial
Protection.
ACTION: Advance notice of proposed
rulemaking.
AGENCY:
With certain exceptions,
Regulation Z requires creditors to make
a reasonable, good faith determination
of a consumer’s ability to repay any
residential mortgage loan, and loans that
meet Regulation Z’s requirements for
‘‘qualified mortgages’’ obtain certain
protections from liability. One category
of qualified mortgages (QMs) is loans
that are eligible for purchase or
guarantee by either the Federal National
Mortgage Association (Fannie Mae) or
the Federal Home Loan Mortgage
Corporation (Freddie Mac). Under
Regulation Z, this category of QMs
(Temporary GSE QM loans) is
scheduled to expire no later than
January 10, 2021. The Bureau currently
plans to allow the Temporary GSE QM
loan category to expire in January 2021
or after a short extension, if necessary,
to facilitate a smooth and orderly
transition away from the Temporary
GSE QM loan category. The Bureau is
considering whether to propose
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SUMMARY:
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revisions to Regulation Z’s general
qualified mortgage definition in light of
that planned expiration and is issuing
this ANPR to request information about
possible revisions.
DATES: Comments must be received on
or before September 16, 2019.
ADDRESSES: You may submit comments,
identified by Docket No. CFPB–2019–
0039 or RIN 3170–AA98, by any of the
following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Email: 2019-ANPR-ATRQM@
cfpb.gov. Include Docket No. CFPB–
2019–0039 or RIN 3170–AA98 in the
subject line of the email.
• Mail: Comment Intake—ATR/QM
ANPR, Bureau of Consumer Financial
Protection, 1700 G Street NW,
Washington, DC 20552.
• Hand Delivery/Courier: Comment
Intake—ATR/QM ANPR, Bureau of
Consumer Financial Protection, 1700 G
Street NW, Washington, DC 20552.
Instructions: The Bureau encourages
the early submission of comments. All
submissions should include the agency
name and docket number or Regulatory
Information Number (RIN) for this
rulemaking. Because paper mail in the
Washington, DC area and at the Bureau
is subject to delay, commenters are
encouraged to submit comments
electronically. In general, all comments
received will be posted without change
to https://www.regulations.gov. In
addition, comments will be available for
public inspection and copying at 1700
G Street NW, Washington, DC 20552, on
official business days between the hours
of 10:00 a.m. and 5:00 p.m. Eastern
Time. You can make an appointment to
inspect the documents by telephoning
202–435–7275.
All comments, including attachments
and other supporting materials, will
become part of the public record and
subject to public disclosure. Proprietary
or sensitive personal information, such
as account numbers, Social Security
numbers, or names of other individuals,
should not be included. Comments will
not be edited to remove any identifying
or contact information.
FOR FURTHER INFORMATION CONTACT: Seth
Caffrey, Joseph Devlin, or Courtney
Jean, Senior Counsels, Office of
Regulations, at 202–435–7700. If you
require this document in an alternative
electronic format, please contact CFPB_
accessibility@cfpb.gov.
SUPPLEMENTARY INFORMATION: The
Bureau is issuing this ANPR to request
information regarding Regulation Z’s
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37155
definition of qualified mortgage loans.1
The Bureau invites comment on all
aspects of this ANPR from all interested
parties, including consumers, consumer
advocacy groups, industry members and
trade groups, and other members of the
public.
I. Background
A. Dodd-Frank Amendments to the
Truth in Lending Act
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (DoddFrank Act) amended the Truth in
Lending Act (TILA) to establish, among
other things, ability-to-repay (ATR)
requirements in connection with the
origination of most residential mortgage
loans.2 The amendments were intended
‘‘to assure that consumers are offered
and receive residential mortgage loans
on terms that reasonably reflect their
ability to repay the loans and that are
understandable and not unfair,
deceptive or abusive.’’ 3 As amended,
TILA prohibits a creditor from making
a residential mortgage loan unless the
creditor makes a reasonable and good
faith determination based on verified
and documented information that the
consumer has a reasonable ability to
repay the loan.4
TILA identifies the factors a creditor
must consider in making a reasonable
and good faith assessment of a
consumer’s ability to repay. These
factors are the consumer’s credit history,
current and expected income, current
obligations, debt-to-income ratio or
residual income after paying nonmortgage debt and mortgage-related
obligations, employment status, and
other financial resources other than
equity in the dwelling or real property
that secures repayment of the loan.5 A
creditor, however, may not be certain
whether its ATR determination is
reasonable in a particular case, and it
risks liability if a court or a regulator,
including the Bureau, later concludes
1 See
12 CFR 1026.43.
Law 111–203, sec. 1411–12, 1414, 124
Stat. 1376 (2010); 15 U.S.C. 1639c.
3 15 U.S.C. 1639b(a)(2).
4 15 U.S.C. 1639c(a)(1). TILA section 103 defines
‘‘residential mortgage loan’’ to mean, with some
exceptions including open-end credit plans, ‘‘any
consumer credit transaction that is secured by a
mortgage, deed of trust, or other equivalent
consensual security interest on a dwelling or on
residential real property that includes a dwelling.’’.
15 U.S.C. 1602(dd)(5). TILA section 129C also
exempts certain residential mortgage loans from the
ability-to-repay requirements. See, e.g., 15 U.S.C.
1639c(a)(8) (exempting reverse mortgages and
temporary or bridge loans with a term of 12 months
or less).
5 15 U.S.C. 1639c(a)(3).
2 Public
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that the determination was not
reasonable.
TILA addresses this uncertainty by
defining a category of loans—called
qualified mortgages (QMs)—for which a
creditor ‘‘may presume that the loan has
met’’ the ATR requirements.6 The
statute generally defines qualified
mortgage to mean any residential
mortgage loan for which:
• There is no negative amortization,
interest-only payments, or balloon
payments;
• The loan term does not exceed 30
years;
• The total points and fees generally
do not exceed 3 percent of the loan
amount;
• The income and assets relied upon
for repayment are verified and
documented;
• The underwriting uses a monthly
payment based on the maximum rate
during the first five years, uses a
payment schedule that fully amortizes
the loan over the loan term, and takes
into account all mortgage-related
obligations; and
• The loan complies with any
guidelines or regulations established by
the Bureau relating to the ratio of total
monthly debt to monthly income or
alternative measures of ability to pay
regular expenses after payment of total
monthly debt.7
B. The Ability-to-Repay/Qualified
Mortgage Rule
In January 2013, the Bureau issued a
final rule amending Regulation Z to
implement TILA’s ATR requirements
(January 2013 Final Rule).8 The January
2013 Final Rule became effective on
January 14, 2014, and the Bureau
amended it several times through 2016.9
This ANPR refers to the January 2013
Final Rule and later amendments to it
collectively as the Ability-to-Repay/
Qualified Mortgage Rule, the ATR/QM
Rule, or the Rule.
The ATR/QM Rule implements the
statutory ATR provisions discussed
above and defines several categories of
QM loans.10 Under the Rule, a creditor
that makes a QM loan is protected from
liability presumptively or conclusively,
depending on whether the loan is
‘‘higher priced.’’ 11
6 15
U.S.C. 1639c(b)(1).
U.S.C. 1639c(b)(2)(A).
8 78 FR 6408 (Jan. 30, 2013).
9 See 78 FR 35429 (June 12, 2013); 78 FR 44686
(July 24, 2013); 78 FR 60382 (Oct. 1, 2013); 79 FR
65300 (Nov. 3, 2014); 80 FR 59944 (Oct. 2, 2015);
81 FR 16074 (Mar. 25, 2016).
10 12 CFR 1026.43(c), (e).
11 The Rule generally defines a ‘‘higher priced’’
loan to mean a first-lien mortgage with an annual
percentage rate (APR) that exceeded the average
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One category of QM loans defined by
the Rule consists of ‘‘General QM
loans.’’ A loan is a General QM loan if:
• The loan does not have negativeamortization, interest-only, or balloonpayment features, a term that exceeds 30
years, or points and fees that exceed
specified limits; 12
• The creditor underwrites the loan
based on a fully amortizing schedule
using the maximum rate permitted
during the first five years; 13
• The creditor considers and verifies
the consumer’s income and debt
obligations in accordance with
Appendix Q of the Rule; 14 and
• The ratio of the consumer’s total
monthly debt to total monthly income
(DTI ratio) is no more than 43 percent,
determined in accordance with
Appendix Q of the Rule.15
Appendix Q contains standards for
calculating and verifying debt and
income for purposes of determining
whether a mortgage satisfies the 43
percent DTI limit for General QM loans.
The standards in Appendix Q were
adapted from guidelines maintained by
the Department of Housing and Urban
Development’s Federal Housing
Administration (FHA) when the January
2013 Final Rule was issued.16 Appendix
Q addresses how to determine a
consumer’s employment-related income
(e.g., income from wages, commissions,
and retirement plans); non-employment
related income (e.g., income from
alimony and child support payments,
investments, and property rentals); and
liabilities, including recurring and
contingent liabilities and projected
obligations.17
A second, temporary category of QM
loans defined by the Rule consists of
mortgages that: (1) Comply with the
Rule’s prohibitions on certain loan
features, its underwriting requirements,
prime offer rate (APOR) for a comparable
transaction as of the date the interest rate was set
by 1.5 or more percentage points; or a subordinatelien mortgage with an APR that exceeded the APOR
for a comparable transaction as of the date the
interest rate was set by 3.5 or more percentage
points. 12 CFR 1026.43(b)(4). A creditor that makes
a QM loan that is not ‘‘higher priced’’ is entitled
to a conclusive presumption that it has complied
with the Rule—i.e., the creditor receives a safe
harbor. 12 CFR 1026.43(e)(1)(i). A creditor that
makes a QM loan that is ‘‘higher priced’’ is entitled
to a rebuttable presumption that it has complied
with the Rule. 12 CFR 1026.43(e)(1)(ii).
12 12 CFR 1026.43(e)(2)(i)–(iii).
13 12 CFR 1026.43(e)(2)(iv).
14 12 CFR 1026.43(e)(v).
15 12 CFR 1026.43(e)(vi).
16 78 FR 6408, 6527–28 (Jan. 30, 2013) (noting
that Appendix Q incorporates, with certain
modifications, the definitions and standards in
HUD Handbook 4155.1, Mortgage Credit Analysis
for Mortgage Insurance on One-to-Four-Unit
Mortgage Loans).
17 12 CFR 1026, Appendix Q.
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and its limitations on points and fees; 18
and (2) are eligible to be purchased or
guaranteed by either Fannie Mae or
Freddie Mac (collectively, the GSEs)
while under the conservatorship of the
Federal Housing Finance Agency
(FHFA) (Temporary GSE QM loans).19
Unlike for General QM loans,
Regulation Z does not prescribe a DTI
limit for Temporary GSE QM loans.
Thus, a loan can qualify as a Temporary
GSE QM loan even if the DTI ratio
exceeds 43 percent, as long as the DTI
ratio meets the GSEs’ DTI requirements
and other underwriting criteria. In
addition, income and debt for such
loans, and DTI ratios, generally are
verified and calculated using GSE
standards, rather than Appendix Q. The
Temporary GSE QM loan category—also
known as the GSE Patch—is scheduled
to expire when the GSEs exit
conservatorship or on January 10, 2021,
whichever comes first.20
In the January 2013 Final Rule, the
Bureau explained why it created the
Temporary GSE QM loan category. The
Bureau observed that it did not believe
that a 43 percent DTI ratio ‘‘represents
the outer boundary of responsible
lending’’ and acknowledged that
historically, and even after the financial
crisis, over 20 percent of mortgages
exceeded that threshold.21 The Bureau
believed, however, that, as DTI ratios
increase, ‘‘the general ability-to-repay
procedures, rather than the qualified
mortgage framework, is better suited for
consideration of all relevant factors that
go to a consumer’s ability to repay a
mortgage loan’’ and that ‘‘[o]ver the long
term . . . there will be a robust and
sizable market for prudent loans beyond
the 43 percent threshold even without
the benefit of the presumption of
compliance that applies to qualified
mortgages.’’ 22
At the same time, the Bureau noted
that the mortgage market was especially
18 12
CFR 1026.43(e)(2)(i)–(iii).
CFR 1026.43(e)(4).
20 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule
created several additional categories of QM loans.
The first additional category consisted of mortgages
eligible to be insured or guaranteed (as applicable)
by the U.S. Department of Housing and Urban
Development (FHA loans), the U.S. Department of
Veterans Affairs (VA loans), the U.S. Department of
Agriculture (USDA loans), and the Rural Housing
Service (RHS loans). 12 CFR 1026.43(e)(4)(ii)(B)–
(E). This temporary category of QM loans no longer
exists because the relevant Federal agencies have
since issued their own qualified mortgage rules.
See, e.g., 24 CFR 203.19 (HUD rule). Other
categories of QM loans provide more flexible
standards for certain loans originated by certain
small creditors. 12 CFR 1026.43(e)(5), (f); cf. 12 CFR
1026.43(e)(6) (applicable only to covered
transactions for which the application was received
before April 1, 2016).
21 78 FR 6408, 6527 (Jan. 30, 2013).
22 Id. at 6527–28.
19 12
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fragile following the mortgage crisis,
and GSE-eligible loans and other
federally insured or guaranteed loans
made up a significant majority of the
market.23 In light of the FHFA’s focus
on ensuring affordability of GSE-eligible
loans following the mortgage crisis, the
Bureau believed that it was appropriate
to consider for a period of time that
GSE-eligible loans were originated with
an appropriate assessment of the
consumer’s ability to repay and
therefore warranted being treated as
QMs.24 The Bureau believed in 2013
that this temporary category of QM
loans would, in the near term, help to
ensure access to responsible, affordable
credit for consumers with DTI ratios
above 43 percent, as well as facilitate
compliance by creditors by promoting
the use of widely recognized, federally
related underwriting standards.25
In making the Temporary GSE QM
loan provision temporary, the Bureau
sought to ‘‘provide an adequate period
for economic, market, and regulatory
conditions to stabilize’’ and ‘‘a
reasonable transition period to the
general qualified mortgage
definition.’’ 26 The Bureau believed that
the Temporary GSE QM loan provision
would benefit consumers by preserving
access to credit while the mortgage
industry adjusted to the ATR/QM
Rule.27 The Bureau also explained that
it structured the Temporary GSE QM
loan provision to cover loans eligible to
be purchased or guaranteed by the
GSEs—regardless of whether the loans
are actually purchased or guaranteed—
to leave room for private investors to
return to the market and secure the
same legal protections as the GSEs.28
The Bureau believed that, as the market
recovered, the GSEs and the Federal
agencies would be able to reduce their
market presence, the percentage of
Temporary GSE QM loans would
decrease, and the market would shift
toward General QM loans and non-QM
loans above a 43 percent DTI ratio.29
The Bureau’s view was that a shift
towards non-QM loans could be
supported by the private market—i.e.,
by institutions holding such loans in
portfolio, selling them in whole, or
securitizing them in a rejuvenated
private label securities (PLS) market.
The Bureau noted that, pursuant to its
statutory obligations under the DoddFrank Act, it would assess the impact of
23 Id.
at 6533–34.
at 6534.
25 Id. at 6533.
26 Id. at 6534.
27 Id. at 6536.
28 Id. at 6534.
29 Id.
24 Id.
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the ATR/QM Rule five years after the
Rule’s effective date, and the assessment
would provide an opportunity to
analyze the Temporary GSE QM loan
provision.30
C. The Bureau’s Assessment of the
Ability-to-Repay/Qualified Mortgage
Rule
Section 1022(d) of the Dodd-Frank
Act requires the Bureau to assess each
of its significant rules and orders and to
publish a report of each assessment
within five years of the effective date of
the rule or order.31 In June 2017, the
Bureau published a request for
information in connection with its
assessment of the ATR/QM Rule
(Assessment RFI).32 In response to the
Assessment RFI, the Bureau received
approximately 480 comments from
creditors, industry groups, consumer
advocacy groups, and individuals.33
Summary of Select Assessment RFI
Comments 34
Commenters addressed a variety of
topics, including the General QM loan
definition and the 43 percent DTI limit.
One industry group stated that, if there
is no significant change in mortgage
performance if the DTI ratio exceeds 43
percent, the DTI limit should be
eliminated or alternative ways to satisfy
the General QM loan definition should
be considered. Several industry groups,
creditors, and individual commenters
advocated raising the DTI limit from 43
percent to 45 percent or higher.35 Two
individual commenters argued against
increasing the DTI limit, while one
individual commenter argued that
investors should be permitted to
establish their own DTI limits. Several
industry groups, a creditor, and
individual commenters stated that the
DTI limit should be eliminated because
it has disadvantaged consumers who
have income that is difficult to
document, and because other
measurements, such as cash flow, better
indicate a consumer’s ability to repay a
loan.
Many commenters discussed
perceived problems with Appendix Q of
30 Id.
U.S.C. 5512(d).
FR 25246 (June 1, 2017).
33 See Bureau of Consumer Fin. Prot., Ability-toRepay and Qualified Mortgage Rule Assessment
Report, at 243 (Jan. 2019), https://
www.consumerfinance.gov/documents/7165/cfpb_
ability-to-repay-qualified-mortgage_assessmentreport.pdf (Assessment Report or Report).
34 See id. at Appendix B (summarizing comments
received in response to the Assessment RFI).
35 The Bureau’s analysis of GSE loan data suggests
that the GSEs have used a DTI threshold of 45
percent on loans eligible for purchase or guarantee.
See id. at 97–98.
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32 82
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Regulation Z. An industry group stated
that Appendix Q was borrowed from
static, vague, and outdated guidelines
that do not reflect today’s employment
and income trends and documentation
standards. Several industry groups and
creditors stated that calculating and
verifying debt and income in
accordance with Appendix Q is
particularly burdensome for
applications from consumers who
receive income from self- or part-time
employment, have irregular income, or
wish to use asset depletion as income.
A coalition of consumer advocacy
groups stated that the documentation
standards for self-employment income
can discourage creditors and borrowers
from pursuing loans when such income
is present.
Multiple industry groups and
creditors advocated for specific changes
to discrete elements of Appendix Q,
such as the provisions addressing
employment verification, work-history
gaps, Social Security income, and the
use of tax information. Two industry
groups and two individual commenters
stated that the Bureau should approve
alternatives to Appendix Q, such as the
standards used by the GSEs, FHA, the
U.S. Department of Veterans Affairs,
and the Rural Housing Service. Several
industry groups, a creditor, and a
consumer advocacy group stated that
Appendix Q should be eliminated
altogether.
Commenters also specifically
addressed the Temporary GSE QM loan
provision. While commenters generally
agreed that the provision has been
beneficial, they disagreed about how the
Bureau should address its expiration.
Regarding beneficial effects, multiple
commenters stated that the Temporary
GSE QM loan provision has prevented
significant disruption in the mortgage
market and has enabled creditors to
lend efficiently and to more consumers.
Several industry groups stated that the
Temporary GSE QM loan provision has
combined a regulatory bright line with
flexibility, allowing creditors to reach
deeper into the population of
creditworthy consumers.
Commenters expressed a range of
ideas for addressing the Temporary GSE
QM loan provision’s expiration, from
making the provision permanent, to
extending it for a period of time or to
other products, to eliminating it. For
example, two consumer advocacy
groups and two industry groups stated
that the Temporary GSE QM loan
provision should be maintained, citing
the negative effect that expiration could
have on the availability of credit, the
need to encourage responsible lending
above a 43 percent DTI ratio, and the
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benefits of maintaining the flexibility
that the GSE standards incorporate.
Three industry groups, two creditors,
and a consumer advocacy group also
argued for making the Temporary GSE
QM loan provision permanent. Three
other industry groups and a consumer
advocacy group suggested an indefinite
extension until an alternative is in
place, an individual commenter
suggested extending the provision for
seven years, and a creditor and two
industry groups supported extending it
to jumbo mortgages.36 One industry
group stated that, although it believes
the Temporary GSE QM loan provision
is essential for mortgage market support
at present, the provision must
eventually expire. Finally, two industry
groups and an individual commenter
argued that the Temporary GSE QM
loan provision should be eliminated and
the Bureau should rely only on TILA’s
statutory requirements to define a
qualified mortgage.
The Bureau’s 2018 Call for Evidence
Beginning in January 2018, the
Bureau issued a general call for
evidence seeking comment on its
enforcement, supervision, rulemaking,
market monitoring, and financial
education activities.37 As part of the call
for evidence, the Bureau published
requests for information relating to,
among other things, the Bureau’s
rulemaking process,38 the Bureau’s
adopted regulations and new
rulemaking authorities,39 and the
Bureau’s inherited regulations and
inherited rulemaking authorities.40
In response to the call for evidence
and requests for information, the Bureau
received comments on the ATR/QM
Rule from stakeholders, including
consumer advocacy groups and industry
groups. Commenters addressed a variety
of topics, including the General QM
loan definition, Appendix Q, and the
Temporary GSE QM loan provision.
Commenters raised concerns about,
among other things, the inflexibility of
the General QM loan definition’s 43
percent DTI limit, the difficulty of
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36 Jumbo
mortgages are mortgages for amounts
greater than the maximum conforming loan limits
set by the FHFA. See, e.g., Fed. Hous. Fin. Agency,
FHFA Announces Maximum Conforming Loan
Limits for 2019 (Nov. 27, 2018), https://
www.fhfa.gov/Media/PublicAffairs/Pages/FHFAAnnounces-Maximum-Conforming-Loan-Limits-for2019.aspx.
37 See Bureau of Consumer Fin. Prot., Call for
Evidence, https://www.consumerfinance.gov/policycompliance/notice-opportunities-comment/archiveclosed/call-for-evidence (last updated Apr. 17,
2018).
38 83 FR 10437 (Mar. 9, 2018).
39 83 FR 12286 (Mar. 21, 2018).
40 83 FR 12881 (Mar. 26, 2018).
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applying Appendix Q in certain
circumstances, and the risks of allowing
the Temporary GSE QM loan provision
to expire without any changes to the
General QM loan definition or
Appendix Q. The concerns raised in
these comments were similar to those
raised in response to the Assessment
RFI, discussed above.
Assessment Report Findings Regarding
Temporary GSE QM Loans
In January 2019, the Bureau published
its ATR/QM Rule Assessment Report.41
The Report included a number of
findings about the effects of the ATR/
QM Rule on the mortgage market
generally, as well as specific findings
about Temporary GSE QM loan
originations.
The Report found that loans with
higher DTI levels are historically
associated with higher levels of ‘‘early
delinquency’’ (i.e., delinquency within
two years of origination), which can
serve as a proxy for measuring whether
a consumer had the ability to repay at
the time the mortgage loan was
consummated.42 The Report also found
that, for high-DTI borrowers—i.e.,
borrowers with DTI ratios above 43
percent—who qualify for loans eligible
for purchase or guarantee by the GSEs,
the Rule has not decreased access to
credit.43 However, based on applicationlevel data obtained from nine large
lenders, the Report found that the Rule
eliminated between 63 and 70 percent
of non-GSE eligible, high-DTI home
purchase loans.44
One main finding about Temporary
GSE QM loans was that such loans
represent a ‘‘large and persistent’’ share
of originations in the conforming
segment of the mortgage market.45 As
discussed, the GSEs’ share of the
conventional, conforming purchasemortgage market was large before the
ATR/QM Rule, and the assessment
found a small increase in that share
since the Rule’s effective date, reaching
71 percent in 2017.46 The Assessment
Report noted that, at least for loans
intended for sale in the secondary
market, creditors generally offer a
Temporary GSE QM loan even when a
General QM loan could be originated.47
41 See
generally Assessment Report, supra note
33.
e.g., id. at 83–84, 100–05.
e.g., id. at 10, 194–96.
44 See, e.g., id. at 10–11, 117, 131–47.
45 Id. at 188. Because the Temporary GSE QM
loan provision generally affects only loans that
conform to the GSEs’ guidelines, the Assessment
Report’s discussion of the Temporary GSE QM loan
provision focused on the conforming segment of the
market, not on non-conforming (e.g., jumbo) loans.
46 Id. at 191.
47 Id. at 192.
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42 See,
43 See,
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The continued prevalence of
Temporary GSE QM loan originations is
contrary to the Bureau’s expectation at
the time of the ATR/QM Rule.48 The
Assessment Report discussed several
possible reasons for this outcome. The
first is Appendix Q. The Report
highlighted commenters’ concerns with
the perceived lack of clarity in
Appendix Q and found that such
concerns ‘‘may have contributed to
investors’—and at least derivatively,
creditors’—preference’’ for Temporary
GSE QM loans.49 Appendix Q, unlike
other standards for calculating and
verifying debt and income, has not been
revised since the January 2013 Final
Rule.50
A second possible reason for the
continued prevalence of Temporary GSE
QM loans is that the GSEs were able to
accommodate demand for mortgages
above the General QM loan DTI limit of
43 percent as the DTI distribution in the
market shifted upward. According to the
Report, in the years since the ATR/QM
Rule took effect, house prices have
increased, and consumers hold more
mortgage and other debt (including
student loan debt), all of which have
caused the DTI distribution to shift
up.51 Mortgages with DTI ratios greater
than 43 percent recently have been an
increasing share of Temporary GSE QM
loan originations.52
The Assessment Report found that a
third possible reason for the persistence
of Temporary GSE QM loans is the
structure of the secondary market. If
lenders adhere to the GSEs’ guidelines,
they gain access to a robust, highly
liquid secondary market.53 In contrast,
while private market securitizations
have grown somewhat in recent years,
their volume is still a fraction of their
pre-crisis levels.54 According to the
Assessment Report, recently there
appears to have been some momentum
toward a long-term structure with a
greater role for private market
securitization.55
D. Possible Market Impact of Expiration
of Temporary GSE QM Loan Provision
Based on National Mortgage Database
(NMDB) data,56 the Bureau estimates
48 Id.
at 13, 190, 238.
at 193.
50 Id. at 193–94.
51 Id. at 194.
52 Id. at 194–95.
53 Id. at 196.
54 Id.
55 Id. at 198.
56 The NMDB, jointly developed by the FHFA and
the Bureau, provides de-identified loan
characteristics and performance information for a 5
percent sample of all mortgage originations from
1998 to the present, supplemented by de-identified
49 Id.
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that there were approximately 6.01
million closed-end first-lien residential
mortgage originations in the United
States in 2018. Based on supplemental
data provided by the FHFA, the Bureau
estimates that the GSEs purchased or
guaranteed 52 percent—roughly 3.12
million—of those loans. Of those 3.12
million loans, the Bureau estimates that
31 percent—approximately 957,000
loans—had DTI ratios greater than 43
percent.57 Thus, the Bureau estimates
that, as a result of the General QM loan
definition’s 43 percent DTI limit,
approximately 957,000 loans—16
percent of all closed-end first-lien
residential mortgage originations in
2018—fell within the Temporary GSE
QM loan definition but not the General
QM loan definition.58 Throughout this
ANPR, the Bureau refers to loans that
fall within the Temporary GSE QM loan
definition but not the General QM loan
definition as High-DTI GSE loans. The
Bureau expects that High-DTI GSE loans
will continue to comprise a significant
proportion of mortgage originations
through January 2021, when the
Temporary GSE QM loan definition is
scheduled to expire.
The Bureau has identified several
ways that the market for loans that
would have been High-DTI GSE loans
may respond to the expiration of the
Temporary GSE QM loan definition.
The Bureau recognizes the inherent
challenges of identifying possible
market responses that may be
contingent on future economic, legal,
and policy developments; nevertheless,
the Bureau believes that possible market
responses need to be considered in
determining the best possible response
loan and borrower characteristics from Federal
administrative sources and credit reporting data.
See Bureau of Consumer Fin. Prot., Sources and
Uses of Data at the Bureau of Consumer Financial
Protection, at 55–56 (Sept. 2018), https://
www.consumerfinance.gov/documents/6850/bcfp_
sources-uses-of-data.pdf. Differences in total market
size estimates between NMDB data and Home
Mortgage Disclosure Act (HMDA) data are
attributable to differences in coverage and data
construction methodology.
57 The Bureau estimates that 616,000 of these
loans were for home purchases, and 341,000 were
refinance loans. In addition, the Bureau estimates
that the share of these loans with DTI ratios over
45 percent has varied over time due to changes in
market conditions and GSE underwriting standards,
rising from 47 percent in 2016 to 56 percent in
2017, and further to 69 percent in 2018.
58 This estimate only includes GSE-purchased
Temporary GSE QM loans that do not fall within
the General QM loan definition because they have
a DTI ratio over 43 percent. An additional, smaller
number of Temporary GSE QM loans purchased by
the GSEs may not fall within the General QM loan
definition because of documentation or other
underwriting differences. The estimate also does
not include Temporary GSE QM loans that were
eligible for purchase by the GSEs but were not sold
to the GSEs.
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to the expiration of the Temporary GSE
QM loan definition. In identifying these
possible market responses, the Bureau
makes several assumptions about the
future behavior of market participants.
The GSEs currently are not permitted to
purchase non-QM loans, and the Bureau
assumes no change in this policy. The
Bureau also assumes that lenders’
preference for making Temporary GSE
QM loans, and investors’ preference for
purchasing such loans, is driven in part
by the safe harbor provided to such
loans, and that these preferences will
continue at least for some lenders and
investors.
Given these assumptions, it seems
likely, first, that many borrowers who
would have obtained High-DTI GSE
loans will instead obtain FHAguaranteed loans since FHA currently
guarantees loans with DTI ratios up to
57 percent.59 The number of loans that
move to FHA would depend in the first
instance on FHA’s willingness and
ability to guarantee such loans, whether
FHA continues to treat all loans that it
guarantees as QMs under its own QM
rule, and on how many High-DTI GSE
loans exceed FHA’s loan-amount limit.
For example, the Bureau estimates that,
in 2018, 11 percent of High-DTI GSE
loans exceeded FHA’s loan-amount
limit.60 This creates an outer limit on
the share of High-DTI GSE loans that
could move to FHA.
Second, it is possible that some
borrowers who would have sought
High-DTI GSE loans will be able to
obtain loans in the private market. The
number of loans would likely depend,
in part, on whether actors in the private
market are willing to assume the credit
risk associated with funding High-DTI
GSE loans as non-QM loans or smallcreditor portfolio QM loans 61 and, if so,
whether actors in the private market
would offer more competitive pricing or
terms. For example, the Bureau
estimates that 55 percent of High-DTI
GSE loans in 2018 had credit scores at
59 In fiscal year 2018, approximately 55 percent
of FHA-insured purchase mortgages had a DTI ratio
above 43 percent. U.S. Dep’t of Hous. & Urban Dev.,
Annual Report to Congress Regarding the Financial
Status of the FHA Mutual Mortgage Insurance
Fund, Fiscal Year 2018, at 30 (Nov. 15, 2018),
https://www.hud.gov/sites/dfiles/Housing/
documents/2018fhaannualreportMMIFund.pdf.
60 In 2018, FHA’s county-level maximum loan
limits ranged from $271,050 to $721,050. See U.S.
Dep’t of Hous. & Urban Dev., FHA Mortgage Limits,
https://entp.hud.gov/idapp/html/hicostlook.cfm
(last visited July 24, 2019).
61 See 12 CFR 1026.43(e)(5) (extending QM status
to certain portfolio loans originated by certain small
creditors). In addition, Section 101 of the Economic
Growth, Regulatory Relief, and Consumer
Protection Act, Public Law 115–174, 101, 132 Stat.
1296 (2018), amended TILA to add a safe-harbor for
small-creditor portfolio loans. See 15 U.S.C.
1639c(b)(2)(F).
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or above 680 and loan-to-value (LTV)
ratios at or below 80 percent—credit
characteristics traditionally considered
attractive to actors in the private market.
The Bureau also notes that there are
certain built-in costs to FHA loans—
namely, mortgage insurance
premiums—which could be a basis for
competition, and that depository
institutions in recent years have shied
away from originating and servicing
FHA loans due to the obligations and
risks associated with such loans. At the
same time, as the Assessment Report
found, there recently has been some
momentum toward a greater role for
private market non-QM loans, but it is
uncertain how great this role will be in
the future.
Third, if FHA and actors in the
private market together do not guarantee
or make all of the High-DTI GSE loans,
some borrowers who would have sought
High-DTI GSE loans might not obtain
loans at all. Other borrowers who would
have sought High-DTI GSE loans may
simply adapt to changing options and
make different choices. For example,
some consumers may respond to the
expiration of the Temporary GSE QM
loan definition by adjusting their
borrowing to result in a lower DTI ratio.
II. Topics on Which the Bureau Seeks
Comment
As discussed above, the Temporary
GSE QM loan provision is scheduled to
expire no later than January 10, 2021.
The Bureau does not intend to make the
Temporary GSE QM loan provision
permanent. The Bureau continues to
believe, as it did in issuing the ATR/QM
Rule, that consumers would be
disserved if ‘‘the qualified mortgage rule
[were to] define the limit of credit
availability.’’ 62 The Bureau also is
concerned about presuming indefinitely
that loans eligible to be purchased or
guaranteed by the GSEs—whether or not
the GSEs are under conservatorship—
have been originated with appropriate
consideration of consumers’ ability to
repay. Indeed, one GSE loosened its
underwriting standards in ways that
proved unsustainable.63 In addition, the
Bureau is concerned that making the
Temporary GSE QM loan provision
permanent could stifle innovation and
the development of competitive privatesector approaches to underwriting. The
Bureau also is concerned that, as long as
the Temporary GSE QM loan provision
continues, the private market is less
likely to rebound. Indeed, the existence
of the Temporary GSE QM loan
provision may be contributing to the
62 78
FR 6408, 6528 (Jan. 30, 2013).
Report, supra note 33, at 194–95.
63 Assessment
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continuing anemic state of the private
mortgage-backed securities market. For
all these reasons, the Bureau believes
that making the Temporary GSE QM
loan provision permanent appears to be
inconsistent with the purposes of
TILA’s ATR provision, and with the
Bureau’s mandate. The Bureau therefore
seeks comment on the topics and
questions listed below in light of the
Bureau’s intent not to make the GSE
Patch permanent.
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A. Assessing Ability To Repay Under the
General QM Loan Definition
The Bureau is considering whether to
propose to revise Regulation Z’s General
QM Loan definition in light of the
planned expiration of the Temporary
GSE QM loan provision in January 2021.
The Bureau is considering whether the
definition should retain a direct
measure of a consumer’s personal
finances, such as DTI ratio or residual
income, and how that measure should
be structured. The Bureau is also
seeking comment on whether the
definition should instead include an
alternative method for assessing
financial capacity or should be limited
to the express statutory criteria.
To assist the Bureau in developing
any such proposals, the Bureau requests
public comment on the questions below.
The Bureau requests that commenters
provide data and analysis to support
their views. Commenters need not
resubmit data provided to the Bureau in
connection with the Assessment RFI or
the 2018 call for evidence initiative.
1. Direct Measures of a Consumer’s
Personal Finances
The Dodd-Frank Act amended TILA
to authorize the Bureau to adopt a DTI
limit as part of the General QM loan
definition.64 In the preamble to the
January 2013 Final Rule, the Bureau
provided several reasons for using DTI
ratio and for setting the limit at 43
percent. First, the Bureau stated that the
QM criteria should include a standard
for evaluating whether consumers have
the ability to repay their mortgage loans,
in addition to the statute’s product
feature and general underwriting
requirements.65 Second, the Bureau
noted that DTI ratios are a common and
useful tool for evaluating a consumer’s
ability to repay a loan over time
because, as the available data showed,
DTI ratio correlates with loan
performance as measured by
delinquency rate.66 With respect to the
64 15 U.S.C. 1639c(b)(3); 15 U.S.C.
1639c(b)(2)(A)(vi).
65 78 FR 6408, 6526.
66 Id. at 6505, 6526–27.
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particular threshold chosen, the Bureau
noted that, for many years, FHA used a
43 percent DTI limit as its general
boundary for defining affordability.67
Third, the Bureau predicted that, in
incorporating a well-understood brightline threshold, the 43 percent DTI limit
would provide certainty for creditors
and help to minimize the potential for
disputes and costly litigation over
whether a mortgage is a QM.68 Finally,
the Bureau recognized that there would
be many instances in which individual
consumers could afford a higher DTI
ratio based on their particular
circumstances, but stated that the
general ATR framework, rather than the
QM framework, would be better suited
for such cases.69 The Bureau predicted
that the 43 percent DTI limit over time
would allow room for a robust and
sizable market for non-QMs.70 The
Bureau also suggested that a higher DTI
threshold might require a corresponding
weakening of the strength of the
presumption of compliance, which
would largely defeat the point of
adopting a higher DTI threshold.71
The Bureau’s Assessment Report
found that, both before and after the
financial crisis, loans with higher DTI
ratios are historically associated with
higher levels of early delinquency,
which, in turn, is indicative of the lack
of ability to repay at origination.72 The
Report also found that, overall,
inclusion of a DTI limit in the General
QM loan definition appears to have
reduced the number of loan originations
with DTI ratios above 43 percent and
increased the number with DTI ratios at
or just below the limit.73 In addition, the
Report found that a robust market for
non-QM loans above the 43 percent DTI
limit has not materialized as the Bureau
had predicted when it promulgated the
Rule.74 The Report also noted recent
academic research indicating that DTI
limits can have broader housing market
effects, potentially decreasing house
price fluctuations and the resulting
borrower responses to pricing
corrections.75
at 6505.
at 6505–06.
69 Id. at 6527–28.
70 Id. at 6506.
71 Id. at 6528.
72 Assessment Report, supra note 33, at 83–84,
100–05.
73 Id. at 115–47.
74 Id. at 198.
75 Id. at 99–100. Respondents to the Bureau’s
Assessment RFI noted that high-DTI lending can
lead to house price booms. Respondents also
observed that the General QM loan DTI limit of 43
percent may help constrain such house price
growth, but such effects likely have been diluted by
the Temporary GSE QM loan provision’s allowance
of DTIs above 43 percent. See Lynn Fisher, Norbert
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68 Id.
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In adopting a DTI limit in the January
2013 Final Rule, the Bureau
acknowledged arguments that residual
income—generally defined as the
monthly income that remains after a
consumer pays all personal debts and
obligations, including the prospective
mortgage—may be a better measure of
repayment ability in the long run. The
Bureau concluded, however, that it
lacked sufficient evidence to prescribe a
bright-line rule based on residual
income.76 Some stakeholders have
continued to suggest that residual
income, rather than DTI ratio, should be
used in the General QM loan definition.
Other stakeholders have suggested
combining a higher DTI ratio with a
requirement that creditors also consider
residual income.77 The Bureau has
authority under TILA to prescribe
regulations requiring creditors to
consider such alternative measures of
ability to repay as part of the General
QM loan definition.78
a. Assuming without deciding that, in
addition to the statutory factors, the
Bureau retains as part of the General
QM loan definition a criterion that
directly measures a consumer’s personal
finances, should the Bureau continue to
include only a DTI limit, or should the
Bureau replace or supplement the DTI
limit with another method (e.g., residual
income or another method)? If so, which
method and why? The Bureau requests
that commenters provide data and
analysis to support their views about the
use of DTI, residual income, or any
suggested alternatives that directly
measure a consumer’s personal
finances.
b. Assuming without deciding that the
Bureau retains a DTI limit as part of the
General QM loan definition, should the
limit remain 43 percent? Should the
Bureau increase or decrease the DTI
limit to some other percentage? Should
the Bureau grant QM status to loans
Michel, Tobias Peter & Edward J. Pinto, Analysis of
the BCFP’s (CFPB’s) temporary Qualified Mortgage
category announced in January 2013, commonly
known as the ‘‘Patch’’ (Mar. 1, 2019), https://
www.aei.org/publication/analysis-of-the-bcfpscfpbs-temporary-qualified-mortgage-categoryannounced-in-january-2013-commonly-known-asthe-patch.
76 78 FR 6408, 6528.
77 See Eric Kaplan, Michael Stegman, Phillip
Swagel & Theodore Tozer, Milken Institute, A
Blueprint for Administrative Reform of the Housing
Finance System, at 17 (Jan. 2019), https://
assets1b.milkeninstitute.org/assets/Publication/
Viewpoint/PDF/Blueprint-Admin-Reform-HFSystem-1.7.2019-v2.pdf (suggesting that the Bureau
both (1) expand the 43 percent DTI limit to 45
percent to move market share of higher-DTI loans
from the GSEs and FHA to the non-agency market,
and (2) establish a residual income test to protect
against the risk of higher-DTI loans).
78 15 U.S.C. 1639c(b)(3); 15 U.S.C.
1639c(b)(2)(A)(vi).
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with DTI ratios above a prescribed limit
if certain compensating factors are
present? 79 The Bureau requests that
commenters provide data and analysis
to support their views about the optimal
DTI limit if the Bureau were to retain a
DTI limit as part of the General QM loan
definition.
c. Assuming without deciding that the
Bureau retains a criterion that directly
measures a consumer’s personal
finances—DTI ratio, residual income, or
some other measure—the Bureau is
considering what standards creditors
should be permitted or required to use
to calculate and verify debt and income.
Currently, Appendix Q provides these
standards. Appendix Q incorporates
FHA’s guidelines as they existed when
the January 2013 Final Rule was
developed (i.e., FHA’s 2011 Guidelines).
The Bureau intended for Appendix Q to
provide creditors with certainty about
whether they had calculated a loan’s
DTI ratio in a way that the Bureau or a
court would accept, so that the loan’s
compliance with the General QM loan
definition’s DTI limit could be ensured.
Based on extensive public feedback and
its own experience, the Bureau
recognizes that Appendix Q’s methods
for documenting debt and income can
be rigid, that its provisions for
determining what debt and income can
be included in DTI calculations can be
difficult to apply, and that it does not
provide the level of compliance
certainty that the Bureau anticipated.
Stakeholders have reported that these
documentation and determination
concerns are particularly acute for selfemployed consumers, consumers with
part-time employment, and consumers
with irregular or unusual income
streams.
i. Assuming without deciding that the
Bureau retains a criterion that directly
measures a consumer’s personal
finances—DTI ratio, residual income, or
some other measure—should creditors
be required to continue using Appendix
Q to calculate and verify debt and
income? Should the Bureau replace
Appendix Q? If the Bureau retains
Appendix Q, how should it be changed
or supplemented? The Bureau requests
that commenters provide data and
79 For example, typical required compensating
factors for GSE loans with DTIs above 45 percent
include twelve months of cash reserves for the
borrower and a maximum LTV ratio of 80 percent.
See Assessment Report, supra note 33, at 98 n.233.
See also U.S. Dep’t of the Treasury, A Financial
System that Creates Economic Opportunities: Banks
and Credit Unions, at 99 (June 2017), https://
www.treasury.gov/press-center/press-releases/
Documents/A%20Financial%20System.pdf (revised
QM loan requirements should permit higher DTI
loans with compensating factors).
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analysis to support their views about
any suggested changes to Appendix Q.
ii. If the Bureau does not retain
Appendix Q or permits use of an
alternative, what standard should the
Bureau require or permit creditors to
use to calculate and verify debt and
income? Should the Bureau specify in
Regulation Z an existing version of a
widely used method of calculating and
verifying debt and income that creditors
would be required to use? Or, to provide
flexibility to creditors, should the
Bureau combine a general requirement
to use a ‘‘reasonable method’’ with the
option to use, as a safe harbor, a
specified, existing version of a widely
used method for calculating and
verifying debt and income? If the
Bureau were to specify an existing
version of a widely used method for
calculating and verifying debt and
income under either of the approaches
described in this paragraph, which
method (or methods) should be
allowed? Should Appendix Q be one of
them? The Bureau requests that
commenters provide data and analysis
to support their views about the
appropriate approach to calculating and
verifying debt and income.
2. Alternatives to Direct Measures of a
Consumer’s Personal Finances
The purpose of TILA’s ATR
requirement is to ensure that consumers
are offered and receive residential
mortgage loans on terms that reasonably
reflect their ability to repay the loans
and that are understandable and not
unfair, deceptive, or abusive.80 The
ATR/QM Rule sought to achieve this
purpose, in part, by including a DTI
limit in the General QM loan definition.
Some stakeholders have suggested that
the Bureau rely on the statutory QM
loan restrictions only (i.e., prohibitions
on certain loan features, requirements
for underwriting, and a limitation on
points and fees) to define a General QM
loan.81 Others have argued that the
General QM loan definition should
incorporate counter-cyclical limits, such
as LTV ratio, that become more
restrictive as housing prices increase.82
Still other stakeholders have
suggested that the Bureau rely on factors
that do not directly measure a
consumer’s personal finances because
such factors may be more predictive of
default than DTI or other direct
measurements. For example, one
U.S.C. 1639b(a)(2).
Edward DeMarco, Three Ways to Draw
Private Capital Back into Mortgages, Am. Banker
(June 14, 2019), https://www.americanbanker.com/
opinion/three-ways-to-draw-private-capital-backinto-mortgages.
82 See Fisher et al., supra note 75, at 34.
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81 See
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stakeholder has suggested that the
Bureau eliminate the DTI criterion and
provide a QM safe harbor to a loan if the
difference between the loan’s annual
percentage rate (APR) and the average
prime offer rate (APOR) for a
comparable first-lien transaction—i.e.,
the rate spread—is less than 150 basis
points, as long as the loan also meets the
statutory QM criteria.83 This
stakeholder states that mortgage rates
reflect credit risk more holistically than
DTI ratios and that a rate-spread
approach would encourage innovation
in the high-DTI loan market.
Similarly, another stakeholder has
suggested eliminating the DTI criterion
for certain loans, depending on their
pricing.84 Under such an approach, for
example, a loan with a rate spread of:
(1) Less than 150 basis points over
APOR would receive a QM safe harbor
regardless of DTI ratio, as long as the
loan met the statutory QM criteria; (2)
between 150 and 300 basis points over
APOR would receive a QM rebuttable
presumption regardless of DTI ratio, as
long as the loan met the statutory QM
criteria; 85 and (3) 300 basis points or
more over APOR would receive a QM
rebuttable presumption only if the DTI
ratio did not exceed 43 percent and the
loan met the statutory QM criteria. This
stakeholder suggests that near-prime
loans with high DTI ratios can still
perform well, rendering it unnecessary
to impose a DTI limit on these loans. By
contrast, according to this stakeholder,
because higher-rate loans pose greater
risks to consumers, it is critical to
include a DTI threshold for such loans.
Loans with improperly calculated DTI
ratios would lose their QM status, thus
exposing lenders to liability; to
minimize that risk, lenders would be
careful when originating such loans.
Others have suggested that the Bureau
amend the Rule so that any performing
loan that has been on a financial
institution’s books for at least two years
(or some slightly longer time frame)
would automatically convert to a QM
83 See Karan Kaul & Laurie Goodman, Urban Inst.
Hous. Fin. Pol’y Ctr., Updated: What, If Anything,
Should Replace the QM GSE Patch, at 6–7 (Oct.
2018), https://www.urban.org/research/publication/
updated-what-if-anything-should-replace-qm-gsepatch.
84 See generally Eric Stein & Michael Calhoun,
Ctr. for Responsible Lending, A Smarter Qualified
Mortgage Can Benefit Borrowers, Taxpayers, and
the Economy (July 2019), https://
www.responsiblelending.org/sites/default/files/
nodes/files/research-publication/crl-a-smarterqualified-mortgage-july2019.pdf.
85 A slight variation would require a lender
originating a loan in this category to use a validated
underwriting model with statistically-predictive
compensating factors, including DTI or residual
income, in order for the loan to obtain QM status.
See id. at 12.
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loan.86 These stakeholders argue that,
when a loan defaults after performing
for two or three years, it is not
reasonable to conclude that the default
was caused by the creditor’s failure to
consider the consumer’s ability to repay.
Another possibility would be to
require creditors to consider other credit
risk factors, such as credit score or LTV
ratio, in lieu of DTI ratio. The rationale
for such an approach would be similar
to the rationale for the pricing-based
approaches already discussed. That is,
because credit risk factors such as credit
score and LTV ratio are predictive of
default, they arguably are more useful
criteria than DTI for determining
whether a loan will be repaid.87
a. The Bureau requests comment on
whether standards that do not directly
measure a consumer’s personal finances
are consistent with, and further TILA’s
purpose of, ensuring that consumers are
offered and receive residential mortgage
loans on terms that reasonably reflect
their ability to repay the loans. The
Bureau requests that commenters
provide data and analysis to support
their views.
b. The Bureau requests comment on
the advantages and disadvantages of
such standards relative to standards that
directly measure a consumer’s personal
finances, including DTI ratio and
residual income. The Bureau requests
that commenters provide data and
analysis to support their views.
c. Assuming without deciding that the
Bureau were to adopt standards that do
not directly measure a consumer’s
personal finances, should the Bureau
retain the current line separating safeharbor and rebuttable-presumption QMs
or modify it and, if so, how? The Bureau
requests that commenters provide data
and analysis to support their views.
d. The Rule currently provides that a
consumer may rebut the presumption of
compliance only by proving that, based
on the information available to the
creditor at the time of consummation,
the consumer lacked sufficient residual
income to meet living expenses,
including any recurring and material
non-debt obligations of which the
creditor was aware.88 Assuming without
deciding that the Bureau were to adopt
standards that do not directly measure
a consumer’s personal finances, should
the Bureau further specify or clarify the
86 See, e.g., Norbert Michel, The Best Housing
Finance Reform Options for the Trump
Administration, Forbes (July 15, 2019), https://
www.forbes.com/sites/norbertmichel/2019/07/15/
the-best-housing-finance-reform-options-for-thetrump-administration/#4f5640de7d3f.
87 See, e.g., Assessment Report, supra note 33, at
100 n.239.
88 12 CFR 1026.43(e)(1)(ii)(B).
VerDate Sep<11>2014
19:41 Jul 30, 2019
Jkt 247001
grounds on which the presumption of
compliance can be rebutted? The
Bureau requests that commenters
provide data and analysis to support
their views.
B. Other Temporary GSE QM Loan
Issues
1. The Temporary GSE QM loan
provision will remain in effect until the
earlier of January 10, 2021, or the date
that the GSEs exit conservatorship.89 To
minimize disruption to the mortgage
market when the Temporary GSE QM
loan provision expires, should the
Bureau consider any other changes to
Regulation Z’s ability-to-repay and
qualified mortgage provisions (i.e., other
than changes discussed in response to
prior questions)? The Bureau requests
that commenters provide data and
analysis to support their views.
2. The Bureau recognizes that
industry will need time to change its
practices to respond to the expiration of
the Temporary GSE QM loan provision
and any changes the Bureau makes to
the General QM loan definition. To
conduct an orderly rulemaking process
and to smooth the transition to any new
General QM loan definition, the Bureau
requests comment, with supporting
data, on how much time industry would
need to change its practices following
the issuance of a final rule with such a
new definition. If the answer depends
on how the Bureau revises the
definition, the Bureau requests answers
based on alternative possible
definitions.
Dated: July 25, 2019.
Kathleen L. Kraninger,
Director, Bureau of Consumer Financial
Protection.
[FR Doc. 2019–16298 Filed 7–30–19; 8:45 am]
BILLING CODE 4810–AM–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2019–0580; Product
Identifier 2019–NM–019–AD]
RIN 2120–AA64
Airworthiness Directives; Airbus SAS
Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
PO 00000
89 12
CFR 1026.43(e)(4)(iii)(B).
Frm 00009
Fmt 4702
Sfmt 4702
The FAA proposes to adopt a
new airworthiness directive (AD) for all
Airbus SAS Model A330–243, –243F,
–341, –342, and –343 airplanes. This
proposed AD was prompted by a
determination that cracks can develop
on the ripple damper weld of the
hydraulic pressure tube assembly and
reports of failure of the ripple damper
of the hydraulic pressure tube assembly.
This proposed AD would require
replacement of the affected hydraulic
pressure tube assembly or modification
of both engines, as specified in a
European Aviation Safety Agency
(EASA) AD, which will be incorporated
by reference. The FAA is proposing this
AD to address the unsafe condition on
these products.
DATES: The FAA must receive comments
on this proposed AD by September 16,
2019.
ADDRESSES: You may send comments,
using the procedures found in 14 CFR
11.43 and 11.45, by any of the following
methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: 202–493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations, M–
30, West Building Ground Floor, Room
W12–140, 1200 New Jersey Avenue SE,
Washington, DC 20590.
• Hand Delivery: Deliver to Mail
address above between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
For the material identified in this
proposed AD that will be incorporated
by reference (IBR), contact the EASA, at
Konrad-Adenauer-Ufer 3, 50668
Cologne, Germany; telephone +49 221
89990 1000; email ADs@easa.europa.eu;
internet www.easa.europa.eu. You may
find this IBR material on the EASA
website at https://ad.easa.europa.eu.
You may view this IBR material at the
FAA, Transport Standards Branch, 2200
South 216th St., Des Moines, WA. For
information on the availability of this
material at the FAA, call 206–231–3195.
It is also available in the AD docket on
the internet at https://
www.regulations.gov by searching for
and locating Docket No. FAA–2019–
0580.
SUMMARY:
Examining the AD Docket
You may examine the AD docket on
the internet at https://
www.regulations.gov by searching for
and locating Docket No. FAA–2019–
0580; or in person at Docket Operations
between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
The AD docket contains this NPRM, the
E:\FR\FM\31JYP1.SGM
31JYP1
]]>Agencies
[Federal Register Volume 84, Number 147 (Wednesday, July 31, 2019)]
[Proposed Rules]
[Pages 37155-37162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16298]
=======================================================================
-----------------------------------------------------------------------
BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2019-0039]
RIN 3170-AA98
Qualified Mortgage Definition Under the Truth in Lending Act
(Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Advance notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: With certain exceptions, Regulation Z requires creditors to
make a reasonable, good faith determination of a consumer's ability to
repay any residential mortgage loan, and loans that meet Regulation Z's
requirements for ``qualified mortgages'' obtain certain protections
from liability. One category of qualified mortgages (QMs) is loans that
are eligible for purchase or guarantee by either the Federal National
Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage
Corporation (Freddie Mac). Under Regulation Z, this category of QMs
(Temporary GSE QM loans) is scheduled to expire no later than January
10, 2021. The Bureau currently plans to allow the Temporary GSE QM loan
category to expire in January 2021 or after a short extension, if
necessary, to facilitate a smooth and orderly transition away from the
Temporary GSE QM loan category. The Bureau is considering whether to
propose revisions to Regulation Z's general qualified mortgage
definition in light of that planned expiration and is issuing this ANPR
to request information about possible revisions.
DATES: Comments must be received on or before September 16, 2019.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2019-
0039 or RIN 3170-AA98, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include Docket No. CFPB-
2019-0039 or RIN 3170-AA98 in the subject line of the email.
Mail: Comment Intake--ATR/QM ANPR, Bureau of Consumer
Financial Protection, 1700 G Street NW, Washington, DC 20552.
Hand Delivery/Courier: Comment Intake--ATR/QM ANPR, Bureau
of Consumer Financial Protection, 1700 G Street NW, Washington, DC
20552.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, commenters are encouraged to submit comments
electronically. In general, all comments received will be posted
without change to https://www.regulations.gov. In addition, comments
will be available for public inspection and copying at 1700 G Street
NW, Washington, DC 20552, on official business days between the hours
of 10:00 a.m. and 5:00 p.m. Eastern Time. You can make an appointment
to inspect the documents by telephoning 202-435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary or sensitive personal information, such as account numbers,
Social Security numbers, or names of other individuals, should not be
included. Comments will not be edited to remove any identifying or
contact information.
FOR FURTHER INFORMATION CONTACT: Seth Caffrey, Joseph Devlin, or
Courtney Jean, Senior Counsels, Office of Regulations, at 202-435-7700.
If you require this document in an alternative electronic format,
please contact [email protected].
SUPPLEMENTARY INFORMATION: The Bureau is issuing this ANPR to request
information regarding Regulation Z's definition of qualified mortgage
loans.\1\ The Bureau invites comment on all aspects of this ANPR from
all interested parties, including consumers, consumer advocacy groups,
industry members and trade groups, and other members of the public.
---------------------------------------------------------------------------
\1\ See 12 CFR 1026.43.
---------------------------------------------------------------------------
I. Background
A. Dodd-Frank Amendments to the Truth in Lending Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) amended the Truth in Lending Act (TILA) to establish,
among other things, ability-to-repay (ATR) requirements in connection
with the origination of most residential mortgage loans.\2\ The
amendments were intended ``to assure that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loans and that are understandable and not
unfair, deceptive or abusive.'' \3\ As amended, TILA prohibits a
creditor from making a residential mortgage loan unless the creditor
makes a reasonable and good faith determination based on verified and
documented information that the consumer has a reasonable ability to
repay the loan.\4\
---------------------------------------------------------------------------
\2\ Public Law 111-203, sec. 1411-12, 1414, 124 Stat. 1376
(2010); 15 U.S.C. 1639c.
\3\ 15 U.S.C. 1639b(a)(2).
\4\ 15 U.S.C. 1639c(a)(1). TILA section 103 defines
``residential mortgage loan'' to mean, with some exceptions
including open-end credit plans, ``any consumer credit transaction
that is secured by a mortgage, deed of trust, or other equivalent
consensual security interest on a dwelling or on residential real
property that includes a dwelling.''. 15 U.S.C. 1602(dd)(5). TILA
section 129C also exempts certain residential mortgage loans from
the ability-to-repay requirements. See, e.g., 15 U.S.C. 1639c(a)(8)
(exempting reverse mortgages and temporary or bridge loans with a
term of 12 months or less).
---------------------------------------------------------------------------
TILA identifies the factors a creditor must consider in making a
reasonable and good faith assessment of a consumer's ability to repay.
These factors are the consumer's credit history, current and expected
income, current obligations, debt-to-income ratio or residual income
after paying non-mortgage debt and mortgage-related obligations,
employment status, and other financial resources other than equity in
the dwelling or real property that secures repayment of the loan.\5\ A
creditor, however, may not be certain whether its ATR determination is
reasonable in a particular case, and it risks liability if a court or a
regulator, including the Bureau, later concludes
[[Page 37156]]
that the determination was not reasonable.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 1639c(a)(3).
---------------------------------------------------------------------------
TILA addresses this uncertainty by defining a category of loans--
called qualified mortgages (QMs)--for which a creditor ``may presume
that the loan has met'' the ATR requirements.\6\ The statute generally
defines qualified mortgage to mean any residential mortgage loan for
which:
---------------------------------------------------------------------------
\6\ 15 U.S.C. 1639c(b)(1).
---------------------------------------------------------------------------
There is no negative amortization, interest-only payments,
or balloon payments;
The loan term does not exceed 30 years;
The total points and fees generally do not exceed 3
percent of the loan amount;
The income and assets relied upon for repayment are
verified and documented;
The underwriting uses a monthly payment based on the
maximum rate during the first five years, uses a payment schedule that
fully amortizes the loan over the loan term, and takes into account all
mortgage-related obligations; and
The loan complies with any guidelines or regulations
established by the Bureau relating to the ratio of total monthly debt
to monthly income or alternative measures of ability to pay regular
expenses after payment of total monthly debt.\7\
---------------------------------------------------------------------------
\7\ 15 U.S.C. 1639c(b)(2)(A).
---------------------------------------------------------------------------
B. The Ability-to-Repay/Qualified Mortgage Rule
In January 2013, the Bureau issued a final rule amending Regulation
Z to implement TILA's ATR requirements (January 2013 Final Rule).\8\
The January 2013 Final Rule became effective on January 14, 2014, and
the Bureau amended it several times through 2016.\9\ This ANPR refers
to the January 2013 Final Rule and later amendments to it collectively
as the Ability-to-Repay/Qualified Mortgage Rule, the ATR/QM Rule, or
the Rule.
---------------------------------------------------------------------------
\8\ 78 FR 6408 (Jan. 30, 2013).
\9\ See 78 FR 35429 (June 12, 2013); 78 FR 44686 (July 24,
2013); 78 FR 60382 (Oct. 1, 2013); 79 FR 65300 (Nov. 3, 2014); 80 FR
59944 (Oct. 2, 2015); 81 FR 16074 (Mar. 25, 2016).
---------------------------------------------------------------------------
The ATR/QM Rule implements the statutory ATR provisions discussed
above and defines several categories of QM loans.\10\ Under the Rule, a
creditor that makes a QM loan is protected from liability presumptively
or conclusively, depending on whether the loan is ``higher priced.''
\11\
---------------------------------------------------------------------------
\10\ 12 CFR 1026.43(c), (e).
\11\ The Rule generally defines a ``higher priced'' loan to mean
a first-lien mortgage with an annual percentage rate (APR) that
exceeded the average prime offer rate (APOR) for a comparable
transaction as of the date the interest rate was set by 1.5 or more
percentage points; or a subordinate-lien mortgage with an APR that
exceeded the APOR for a comparable transaction as of the date the
interest rate was set by 3.5 or more percentage points. 12 CFR
1026.43(b)(4). A creditor that makes a QM loan that is not ``higher
priced'' is entitled to a conclusive presumption that it has
complied with the Rule--i.e., the creditor receives a safe harbor.
12 CFR 1026.43(e)(1)(i). A creditor that makes a QM loan that is
``higher priced'' is entitled to a rebuttable presumption that it
has complied with the Rule. 12 CFR 1026.43(e)(1)(ii).
---------------------------------------------------------------------------
One category of QM loans defined by the Rule consists of ``General
QM loans.'' A loan is a General QM loan if:
The loan does not have negative-amortization, interest-
only, or balloon-payment features, a term that exceeds 30 years, or
points and fees that exceed specified limits; \12\
---------------------------------------------------------------------------
\12\ 12 CFR 1026.43(e)(2)(i)-(iii).
---------------------------------------------------------------------------
The creditor underwrites the loan based on a fully
amortizing schedule using the maximum rate permitted during the first
five years; \13\
---------------------------------------------------------------------------
\13\ 12 CFR 1026.43(e)(2)(iv).
---------------------------------------------------------------------------
The creditor considers and verifies the consumer's income
and debt obligations in accordance with Appendix Q of the Rule; \14\
and
---------------------------------------------------------------------------
\14\ 12 CFR 1026.43(e)(v).
---------------------------------------------------------------------------
The ratio of the consumer's total monthly debt to total
monthly income (DTI ratio) is no more than 43 percent, determined in
accordance with Appendix Q of the Rule.\15\
---------------------------------------------------------------------------
\15\ 12 CFR 1026.43(e)(vi).
---------------------------------------------------------------------------
Appendix Q contains standards for calculating and verifying debt
and income for purposes of determining whether a mortgage satisfies the
43 percent DTI limit for General QM loans. The standards in Appendix Q
were adapted from guidelines maintained by the Department of Housing
and Urban Development's Federal Housing Administration (FHA) when the
January 2013 Final Rule was issued.\16\ Appendix Q addresses how to
determine a consumer's employment-related income (e.g., income from
wages, commissions, and retirement plans); non-employment related
income (e.g., income from alimony and child support payments,
investments, and property rentals); and liabilities, including
recurring and contingent liabilities and projected obligations.\17\
---------------------------------------------------------------------------
\16\ 78 FR 6408, 6527-28 (Jan. 30, 2013) (noting that Appendix Q
incorporates, with certain modifications, the definitions and
standards in HUD Handbook 4155.1, Mortgage Credit Analysis for
Mortgage Insurance on One-to-Four-Unit Mortgage Loans).
\17\ 12 CFR 1026, Appendix Q.
---------------------------------------------------------------------------
A second, temporary category of QM loans defined by the Rule
consists of mortgages that: (1) Comply with the Rule's prohibitions on
certain loan features, its underwriting requirements, and its
limitations on points and fees; \18\ and (2) are eligible to be
purchased or guaranteed by either Fannie Mae or Freddie Mac
(collectively, the GSEs) while under the conservatorship of the Federal
Housing Finance Agency (FHFA) (Temporary GSE QM loans).\19\ Unlike for
General QM loans, Regulation Z does not prescribe a DTI limit for
Temporary GSE QM loans. Thus, a loan can qualify as a Temporary GSE QM
loan even if the DTI ratio exceeds 43 percent, as long as the DTI ratio
meets the GSEs' DTI requirements and other underwriting criteria. In
addition, income and debt for such loans, and DTI ratios, generally are
verified and calculated using GSE standards, rather than Appendix Q.
The Temporary GSE QM loan category--also known as the GSE Patch--is
scheduled to expire when the GSEs exit conservatorship or on January
10, 2021, whichever comes first.\20\
---------------------------------------------------------------------------
\18\ 12 CFR 1026.43(e)(2)(i)-(iii).
\19\ 12 CFR 1026.43(e)(4).
\20\ 12 CFR 1026.43(e)(4)(iii)(B). The ATR/QM Rule created
several additional categories of QM loans. The first additional
category consisted of mortgages eligible to be insured or guaranteed
(as applicable) by the U.S. Department of Housing and Urban
Development (FHA loans), the U.S. Department of Veterans Affairs (VA
loans), the U.S. Department of Agriculture (USDA loans), and the
Rural Housing Service (RHS loans). 12 CFR 1026.43(e)(4)(ii)(B)-(E).
This temporary category of QM loans no longer exists because the
relevant Federal agencies have since issued their own qualified
mortgage rules. See, e.g., 24 CFR 203.19 (HUD rule). Other
categories of QM loans provide more flexible standards for certain
loans originated by certain small creditors. 12 CFR 1026.43(e)(5),
(f); cf. 12 CFR 1026.43(e)(6) (applicable only to covered
transactions for which the application was received before April 1,
2016).
---------------------------------------------------------------------------
In the January 2013 Final Rule, the Bureau explained why it created
the Temporary GSE QM loan category. The Bureau observed that it did not
believe that a 43 percent DTI ratio ``represents the outer boundary of
responsible lending'' and acknowledged that historically, and even
after the financial crisis, over 20 percent of mortgages exceeded that
threshold.\21\ The Bureau believed, however, that, as DTI ratios
increase, ``the general ability-to-repay procedures, rather than the
qualified mortgage framework, is better suited for consideration of all
relevant factors that go to a consumer's ability to repay a mortgage
loan'' and that ``[o]ver the long term . . . there will be a robust and
sizable market for prudent loans beyond the 43 percent threshold even
without the benefit of the presumption of compliance that applies to
qualified mortgages.'' \22\
---------------------------------------------------------------------------
\21\ 78 FR 6408, 6527 (Jan. 30, 2013).
\22\ Id. at 6527-28.
---------------------------------------------------------------------------
At the same time, the Bureau noted that the mortgage market was
especially
[[Page 37157]]
fragile following the mortgage crisis, and GSE-eligible loans and other
federally insured or guaranteed loans made up a significant majority of
the market.\23\ In light of the FHFA's focus on ensuring affordability
of GSE-eligible loans following the mortgage crisis, the Bureau
believed that it was appropriate to consider for a period of time that
GSE-eligible loans were originated with an appropriate assessment of
the consumer's ability to repay and therefore warranted being treated
as QMs.\24\ The Bureau believed in 2013 that this temporary category of
QM loans would, in the near term, help to ensure access to responsible,
affordable credit for consumers with DTI ratios above 43 percent, as
well as facilitate compliance by creditors by promoting the use of
widely recognized, federally related underwriting standards.\25\
---------------------------------------------------------------------------
\23\ Id. at 6533-34.
\24\ Id. at 6534.
\25\ Id. at 6533.
---------------------------------------------------------------------------
In making the Temporary GSE QM loan provision temporary, the Bureau
sought to ``provide an adequate period for economic, market, and
regulatory conditions to stabilize'' and ``a reasonable transition
period to the general qualified mortgage definition.'' \26\ The Bureau
believed that the Temporary GSE QM loan provision would benefit
consumers by preserving access to credit while the mortgage industry
adjusted to the ATR/QM Rule.\27\ The Bureau also explained that it
structured the Temporary GSE QM loan provision to cover loans eligible
to be purchased or guaranteed by the GSEs--regardless of whether the
loans are actually purchased or guaranteed--to leave room for private
investors to return to the market and secure the same legal protections
as the GSEs.\28\ The Bureau believed that, as the market recovered, the
GSEs and the Federal agencies would be able to reduce their market
presence, the percentage of Temporary GSE QM loans would decrease, and
the market would shift toward General QM loans and non-QM loans above a
43 percent DTI ratio.\29\ The Bureau's view was that a shift towards
non-QM loans could be supported by the private market--i.e., by
institutions holding such loans in portfolio, selling them in whole, or
securitizing them in a rejuvenated private label securities (PLS)
market. The Bureau noted that, pursuant to its statutory obligations
under the Dodd-Frank Act, it would assess the impact of the ATR/QM Rule
five years after the Rule's effective date, and the assessment would
provide an opportunity to analyze the Temporary GSE QM loan
provision.\30\
---------------------------------------------------------------------------
\26\ Id. at 6534.
\27\ Id. at 6536.
\28\ Id. at 6534.
\29\ Id.
\30\ Id.
---------------------------------------------------------------------------
C. The Bureau's Assessment of the Ability-to-Repay/Qualified Mortgage
Rule
Section 1022(d) of the Dodd-Frank Act requires the Bureau to assess
each of its significant rules and orders and to publish a report of
each assessment within five years of the effective date of the rule or
order.\31\ In June 2017, the Bureau published a request for information
in connection with its assessment of the ATR/QM Rule (Assessment
RFI).\32\ In response to the Assessment RFI, the Bureau received
approximately 480 comments from creditors, industry groups, consumer
advocacy groups, and individuals.\33\
---------------------------------------------------------------------------
\31\ 12 U.S.C. 5512(d).
\32\ 82 FR 25246 (June 1, 2017).
\33\ See Bureau of Consumer Fin. Prot., Ability-to-Repay and
Qualified Mortgage Rule Assessment Report, at 243 (Jan. 2019),
https://www.consumerfinance.gov/documents/7165/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf (Assessment Report or
Report).
---------------------------------------------------------------------------
Summary of Select Assessment RFI Comments \34\
---------------------------------------------------------------------------
\34\ See id. at Appendix B (summarizing comments received in
response to the Assessment RFI).
---------------------------------------------------------------------------
Commenters addressed a variety of topics, including the General QM
loan definition and the 43 percent DTI limit. One industry group stated
that, if there is no significant change in mortgage performance if the
DTI ratio exceeds 43 percent, the DTI limit should be eliminated or
alternative ways to satisfy the General QM loan definition should be
considered. Several industry groups, creditors, and individual
commenters advocated raising the DTI limit from 43 percent to 45
percent or higher.\35\ Two individual commenters argued against
increasing the DTI limit, while one individual commenter argued that
investors should be permitted to establish their own DTI limits.
Several industry groups, a creditor, and individual commenters stated
that the DTI limit should be eliminated because it has disadvantaged
consumers who have income that is difficult to document, and because
other measurements, such as cash flow, better indicate a consumer's
ability to repay a loan.
---------------------------------------------------------------------------
\35\ The Bureau's analysis of GSE loan data suggests that the
GSEs have used a DTI threshold of 45 percent on loans eligible for
purchase or guarantee. See id. at 97-98.
---------------------------------------------------------------------------
Many commenters discussed perceived problems with Appendix Q of
Regulation Z. An industry group stated that Appendix Q was borrowed
from static, vague, and outdated guidelines that do not reflect today's
employment and income trends and documentation standards. Several
industry groups and creditors stated that calculating and verifying
debt and income in accordance with Appendix Q is particularly
burdensome for applications from consumers who receive income from
self- or part-time employment, have irregular income, or wish to use
asset depletion as income. A coalition of consumer advocacy groups
stated that the documentation standards for self-employment income can
discourage creditors and borrowers from pursuing loans when such income
is present.
Multiple industry groups and creditors advocated for specific
changes to discrete elements of Appendix Q, such as the provisions
addressing employment verification, work-history gaps, Social Security
income, and the use of tax information. Two industry groups and two
individual commenters stated that the Bureau should approve
alternatives to Appendix Q, such as the standards used by the GSEs,
FHA, the U.S. Department of Veterans Affairs, and the Rural Housing
Service. Several industry groups, a creditor, and a consumer advocacy
group stated that Appendix Q should be eliminated altogether.
Commenters also specifically addressed the Temporary GSE QM loan
provision. While commenters generally agreed that the provision has
been beneficial, they disagreed about how the Bureau should address its
expiration. Regarding beneficial effects, multiple commenters stated
that the Temporary GSE QM loan provision has prevented significant
disruption in the mortgage market and has enabled creditors to lend
efficiently and to more consumers. Several industry groups stated that
the Temporary GSE QM loan provision has combined a regulatory bright
line with flexibility, allowing creditors to reach deeper into the
population of creditworthy consumers.
Commenters expressed a range of ideas for addressing the Temporary
GSE QM loan provision's expiration, from making the provision
permanent, to extending it for a period of time or to other products,
to eliminating it. For example, two consumer advocacy groups and two
industry groups stated that the Temporary GSE QM loan provision should
be maintained, citing the negative effect that expiration could have on
the availability of credit, the need to encourage responsible lending
above a 43 percent DTI ratio, and the
[[Page 37158]]
benefits of maintaining the flexibility that the GSE standards
incorporate. Three industry groups, two creditors, and a consumer
advocacy group also argued for making the Temporary GSE QM loan
provision permanent. Three other industry groups and a consumer
advocacy group suggested an indefinite extension until an alternative
is in place, an individual commenter suggested extending the provision
for seven years, and a creditor and two industry groups supported
extending it to jumbo mortgages.\36\ One industry group stated that,
although it believes the Temporary GSE QM loan provision is essential
for mortgage market support at present, the provision must eventually
expire. Finally, two industry groups and an individual commenter argued
that the Temporary GSE QM loan provision should be eliminated and the
Bureau should rely only on TILA's statutory requirements to define a
qualified mortgage.
---------------------------------------------------------------------------
\36\ Jumbo mortgages are mortgages for amounts greater than the
maximum conforming loan limits set by the FHFA. See, e.g., Fed.
Hous. Fin. Agency, FHFA Announces Maximum Conforming Loan Limits for
2019 (Nov. 27, 2018), https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Maximum-Conforming-Loan-Limits-for-2019.aspx.
---------------------------------------------------------------------------
The Bureau's 2018 Call for Evidence
Beginning in January 2018, the Bureau issued a general call for
evidence seeking comment on its enforcement, supervision, rulemaking,
market monitoring, and financial education activities.\37\ As part of
the call for evidence, the Bureau published requests for information
relating to, among other things, the Bureau's rulemaking process,\38\
the Bureau's adopted regulations and new rulemaking authorities,\39\
and the Bureau's inherited regulations and inherited rulemaking
authorities.\40\
---------------------------------------------------------------------------
\37\ See Bureau of Consumer Fin. Prot., Call for Evidence,
https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/archive-closed/call-for-evidence (last updated
Apr. 17, 2018).
\38\ 83 FR 10437 (Mar. 9, 2018).
\39\ 83 FR 12286 (Mar. 21, 2018).
\40\ 83 FR 12881 (Mar. 26, 2018).
---------------------------------------------------------------------------
In response to the call for evidence and requests for information,
the Bureau received comments on the ATR/QM Rule from stakeholders,
including consumer advocacy groups and industry groups. Commenters
addressed a variety of topics, including the General QM loan
definition, Appendix Q, and the Temporary GSE QM loan provision.
Commenters raised concerns about, among other things, the inflexibility
of the General QM loan definition's 43 percent DTI limit, the
difficulty of applying Appendix Q in certain circumstances, and the
risks of allowing the Temporary GSE QM loan provision to expire without
any changes to the General QM loan definition or Appendix Q. The
concerns raised in these comments were similar to those raised in
response to the Assessment RFI, discussed above.
Assessment Report Findings Regarding Temporary GSE QM Loans
In January 2019, the Bureau published its ATR/QM Rule Assessment
Report.\41\ The Report included a number of findings about the effects
of the ATR/QM Rule on the mortgage market generally, as well as
specific findings about Temporary GSE QM loan originations.
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\41\ See generally Assessment Report, supra note 33.
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The Report found that loans with higher DTI levels are historically
associated with higher levels of ``early delinquency'' (i.e.,
delinquency within two years of origination), which can serve as a
proxy for measuring whether a consumer had the ability to repay at the
time the mortgage loan was consummated.\42\ The Report also found that,
for high-DTI borrowers--i.e., borrowers with DTI ratios above 43
percent--who qualify for loans eligible for purchase or guarantee by
the GSEs, the Rule has not decreased access to credit.\43\ However,
based on application-level data obtained from nine large lenders, the
Report found that the Rule eliminated between 63 and 70 percent of non-
GSE eligible, high-DTI home purchase loans.\44\
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\42\ See, e.g., id. at 83-84, 100-05.
\43\ See, e.g., id. at 10, 194-96.
\44\ See, e.g., id. at 10-11, 117, 131-47.
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One main finding about Temporary GSE QM loans was that such loans
represent a ``large and persistent'' share of originations in the
conforming segment of the mortgage market.\45\ As discussed, the GSEs'
share of the conventional, conforming purchase-mortgage market was
large before the ATR/QM Rule, and the assessment found a small increase
in that share since the Rule's effective date, reaching 71 percent in
2017.\46\ The Assessment Report noted that, at least for loans intended
for sale in the secondary market, creditors generally offer a Temporary
GSE QM loan even when a General QM loan could be originated.\47\
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\45\ Id. at 188. Because the Temporary GSE QM loan provision
generally affects only loans that conform to the GSEs' guidelines,
the Assessment Report's discussion of the Temporary GSE QM loan
provision focused on the conforming segment of the market, not on
non-conforming (e.g., jumbo) loans.
\46\ Id. at 191.
\47\ Id. at 192.
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The continued prevalence of Temporary GSE QM loan originations is
contrary to the Bureau's expectation at the time of the ATR/QM
Rule.\48\ The Assessment Report discussed several possible reasons for
this outcome. The first is Appendix Q. The Report highlighted
commenters' concerns with the perceived lack of clarity in Appendix Q
and found that such concerns ``may have contributed to investors'--and
at least derivatively, creditors'--preference'' for Temporary GSE QM
loans.\49\ Appendix Q, unlike other standards for calculating and
verifying debt and income, has not been revised since the January 2013
Final Rule.\50\
---------------------------------------------------------------------------
\48\ Id. at 13, 190, 238.
\49\ Id. at 193.
\50\ Id. at 193-94.
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A second possible reason for the continued prevalence of Temporary
GSE QM loans is that the GSEs were able to accommodate demand for
mortgages above the General QM loan DTI limit of 43 percent as the DTI
distribution in the market shifted upward. According to the Report, in
the years since the ATR/QM Rule took effect, house prices have
increased, and consumers hold more mortgage and other debt (including
student loan debt), all of which have caused the DTI distribution to
shift up.\51\ Mortgages with DTI ratios greater than 43 percent
recently have been an increasing share of Temporary GSE QM loan
originations.\52\
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\51\ Id. at 194.
\52\ Id. at 194-95.
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The Assessment Report found that a third possible reason for the
persistence of Temporary GSE QM loans is the structure of the secondary
market. If lenders adhere to the GSEs' guidelines, they gain access to
a robust, highly liquid secondary market.\53\ In contrast, while
private market securitizations have grown somewhat in recent years,
their volume is still a fraction of their pre-crisis levels.\54\
According to the Assessment Report, recently there appears to have been
some momentum toward a long-term structure with a greater role for
private market securitization.\55\
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\53\ Id. at 196.
\54\ Id.
\55\ Id. at 198.
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D. Possible Market Impact of Expiration of Temporary GSE QM Loan
Provision
Based on National Mortgage Database (NMDB) data,\56\ the Bureau
estimates
[[Page 37159]]
that there were approximately 6.01 million closed-end first-lien
residential mortgage originations in the United States in 2018. Based
on supplemental data provided by the FHFA, the Bureau estimates that
the GSEs purchased or guaranteed 52 percent--roughly 3.12 million--of
those loans. Of those 3.12 million loans, the Bureau estimates that 31
percent--approximately 957,000 loans--had DTI ratios greater than 43
percent.\57\ Thus, the Bureau estimates that, as a result of the
General QM loan definition's 43 percent DTI limit, approximately
957,000 loans--16 percent of all closed-end first-lien residential
mortgage originations in 2018--fell within the Temporary GSE QM loan
definition but not the General QM loan definition.\58\ Throughout this
ANPR, the Bureau refers to loans that fall within the Temporary GSE QM
loan definition but not the General QM loan definition as High-DTI GSE
loans. The Bureau expects that High-DTI GSE loans will continue to
comprise a significant proportion of mortgage originations through
January 2021, when the Temporary GSE QM loan definition is scheduled to
expire.
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\56\ The NMDB, jointly developed by the FHFA and the Bureau,
provides de-identified loan characteristics and performance
information for a 5 percent sample of all mortgage originations from
1998 to the present, supplemented by de-identified loan and borrower
characteristics from Federal administrative sources and credit
reporting data. See Bureau of Consumer Fin. Prot., Sources and Uses
of Data at the Bureau of Consumer Financial Protection, at 55-56
(Sept. 2018), https://www.consumerfinance.gov/documents/6850/bcfp_sources-uses-of-data.pdf. Differences in total market size
estimates between NMDB data and Home Mortgage Disclosure Act (HMDA)
data are attributable to differences in coverage and data
construction methodology.
\57\ The Bureau estimates that 616,000 of these loans were for
home purchases, and 341,000 were refinance loans. In addition, the
Bureau estimates that the share of these loans with DTI ratios over
45 percent has varied over time due to changes in market conditions
and GSE underwriting standards, rising from 47 percent in 2016 to 56
percent in 2017, and further to 69 percent in 2018.
\58\ This estimate only includes GSE-purchased Temporary GSE QM
loans that do not fall within the General QM loan definition because
they have a DTI ratio over 43 percent. An additional, smaller number
of Temporary GSE QM loans purchased by the GSEs may not fall within
the General QM loan definition because of documentation or other
underwriting differences. The estimate also does not include
Temporary GSE QM loans that were eligible for purchase by the GSEs
but were not sold to the GSEs.
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The Bureau has identified several ways that the market for loans
that would have been High-DTI GSE loans may respond to the expiration
of the Temporary GSE QM loan definition. The Bureau recognizes the
inherent challenges of identifying possible market responses that may
be contingent on future economic, legal, and policy developments;
nevertheless, the Bureau believes that possible market responses need
to be considered in determining the best possible response to the
expiration of the Temporary GSE QM loan definition. In identifying
these possible market responses, the Bureau makes several assumptions
about the future behavior of market participants. The GSEs currently
are not permitted to purchase non-QM loans, and the Bureau assumes no
change in this policy. The Bureau also assumes that lenders' preference
for making Temporary GSE QM loans, and investors' preference for
purchasing such loans, is driven in part by the safe harbor provided to
such loans, and that these preferences will continue at least for some
lenders and investors.
Given these assumptions, it seems likely, first, that many
borrowers who would have obtained High-DTI GSE loans will instead
obtain FHA-guaranteed loans since FHA currently guarantees loans with
DTI ratios up to 57 percent.\59\ The number of loans that move to FHA
would depend in the first instance on FHA's willingness and ability to
guarantee such loans, whether FHA continues to treat all loans that it
guarantees as QMs under its own QM rule, and on how many High-DTI GSE
loans exceed FHA's loan-amount limit. For example, the Bureau estimates
that, in 2018, 11 percent of High-DTI GSE loans exceeded FHA's loan-
amount limit.\60\ This creates an outer limit on the share of High-DTI
GSE loans that could move to FHA.
---------------------------------------------------------------------------
\59\ In fiscal year 2018, approximately 55 percent of FHA-
insured purchase mortgages had a DTI ratio above 43 percent. U.S.
Dep't of Hous. & Urban Dev., Annual Report to Congress Regarding the
Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal
Year 2018, at 30 (Nov. 15, 2018), https://www.hud.gov/sites/dfiles/Housing/documents/2018fhaannualreportMMIFund.pdf.
\60\ In 2018, FHA's county-level maximum loan limits ranged from
$271,050 to $721,050. See U.S. Dep't of Hous. & Urban Dev., FHA
Mortgage Limits, https://entp.hud.gov/idapp/html/hicostlook.cfm
(last visited July 24, 2019).
---------------------------------------------------------------------------
Second, it is possible that some borrowers who would have sought
High-DTI GSE loans will be able to obtain loans in the private market.
The number of loans would likely depend, in part, on whether actors in
the private market are willing to assume the credit risk associated
with funding High-DTI GSE loans as non-QM loans or small-creditor
portfolio QM loans \61\ and, if so, whether actors in the private
market would offer more competitive pricing or terms. For example, the
Bureau estimates that 55 percent of High-DTI GSE loans in 2018 had
credit scores at or above 680 and loan-to-value (LTV) ratios at or
below 80 percent--credit characteristics traditionally considered
attractive to actors in the private market. The Bureau also notes that
there are certain built-in costs to FHA loans--namely, mortgage
insurance premiums--which could be a basis for competition, and that
depository institutions in recent years have shied away from
originating and servicing FHA loans due to the obligations and risks
associated with such loans. At the same time, as the Assessment Report
found, there recently has been some momentum toward a greater role for
private market non-QM loans, but it is uncertain how great this role
will be in the future.
---------------------------------------------------------------------------
\61\ See 12 CFR 1026.43(e)(5) (extending QM status to certain
portfolio loans originated by certain small creditors). In addition,
Section 101 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act, Public Law 115-174, 101, 132 Stat. 1296 (2018),
amended TILA to add a safe-harbor for small-creditor portfolio
loans. See 15 U.S.C. 1639c(b)(2)(F).
---------------------------------------------------------------------------
Third, if FHA and actors in the private market together do not
guarantee or make all of the High-DTI GSE loans, some borrowers who
would have sought High-DTI GSE loans might not obtain loans at all.
Other borrowers who would have sought High-DTI GSE loans may simply
adapt to changing options and make different choices. For example, some
consumers may respond to the expiration of the Temporary GSE QM loan
definition by adjusting their borrowing to result in a lower DTI ratio.
II. Topics on Which the Bureau Seeks Comment
As discussed above, the Temporary GSE QM loan provision is
scheduled to expire no later than January 10, 2021. The Bureau does not
intend to make the Temporary GSE QM loan provision permanent. The
Bureau continues to believe, as it did in issuing the ATR/QM Rule, that
consumers would be disserved if ``the qualified mortgage rule [were to]
define the limit of credit availability.'' \62\ The Bureau also is
concerned about presuming indefinitely that loans eligible to be
purchased or guaranteed by the GSEs--whether or not the GSEs are under
conservatorship--have been originated with appropriate consideration of
consumers' ability to repay. Indeed, one GSE loosened its underwriting
standards in ways that proved unsustainable.\63\ In addition, the
Bureau is concerned that making the Temporary GSE QM loan provision
permanent could stifle innovation and the development of competitive
private-sector approaches to underwriting. The Bureau also is concerned
that, as long as the Temporary GSE QM loan provision continues, the
private market is less likely to rebound. Indeed, the existence of the
Temporary GSE QM loan provision may be contributing to the
[[Page 37160]]
continuing anemic state of the private mortgage-backed securities
market. For all these reasons, the Bureau believes that making the
Temporary GSE QM loan provision permanent appears to be inconsistent
with the purposes of TILA's ATR provision, and with the Bureau's
mandate. The Bureau therefore seeks comment on the topics and questions
listed below in light of the Bureau's intent not to make the GSE Patch
permanent.
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\62\ 78 FR 6408, 6528 (Jan. 30, 2013).
\63\ Assessment Report, supra note 33, at 194-95.
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A. Assessing Ability To Repay Under the General QM Loan Definition
The Bureau is considering whether to propose to revise Regulation
Z's General QM Loan definition in light of the planned expiration of
the Temporary GSE QM loan provision in January 2021. The Bureau is
considering whether the definition should retain a direct measure of a
consumer's personal finances, such as DTI ratio or residual income, and
how that measure should be structured. The Bureau is also seeking
comment on whether the definition should instead include an alternative
method for assessing financial capacity or should be limited to the
express statutory criteria.
To assist the Bureau in developing any such proposals, the Bureau
requests public comment on the questions below. The Bureau requests
that commenters provide data and analysis to support their views.
Commenters need not resubmit data provided to the Bureau in connection
with the Assessment RFI or the 2018 call for evidence initiative.
1. Direct Measures of a Consumer's Personal Finances
The Dodd-Frank Act amended TILA to authorize the Bureau to adopt a
DTI limit as part of the General QM loan definition.\64\ In the
preamble to the January 2013 Final Rule, the Bureau provided several
reasons for using DTI ratio and for setting the limit at 43 percent.
First, the Bureau stated that the QM criteria should include a standard
for evaluating whether consumers have the ability to repay their
mortgage loans, in addition to the statute's product feature and
general underwriting requirements.\65\ Second, the Bureau noted that
DTI ratios are a common and useful tool for evaluating a consumer's
ability to repay a loan over time because, as the available data
showed, DTI ratio correlates with loan performance as measured by
delinquency rate.\66\ With respect to the particular threshold chosen,
the Bureau noted that, for many years, FHA used a 43 percent DTI limit
as its general boundary for defining affordability.\67\ Third, the
Bureau predicted that, in incorporating a well-understood bright-line
threshold, the 43 percent DTI limit would provide certainty for
creditors and help to minimize the potential for disputes and costly
litigation over whether a mortgage is a QM.\68\ Finally, the Bureau
recognized that there would be many instances in which individual
consumers could afford a higher DTI ratio based on their particular
circumstances, but stated that the general ATR framework, rather than
the QM framework, would be better suited for such cases.\69\ The Bureau
predicted that the 43 percent DTI limit over time would allow room for
a robust and sizable market for non-QMs.\70\ The Bureau also suggested
that a higher DTI threshold might require a corresponding weakening of
the strength of the presumption of compliance, which would largely
defeat the point of adopting a higher DTI threshold.\71\
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\64\ 15 U.S.C. 1639c(b)(3); 15 U.S.C. 1639c(b)(2)(A)(vi).
\65\ 78 FR 6408, 6526.
\66\ Id. at 6505, 6526-27.
\67\ Id. at 6505.
\68\ Id. at 6505-06.
\69\ Id. at 6527-28.
\70\ Id. at 6506.
\71\ Id. at 6528.
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The Bureau's Assessment Report found that, both before and after
the financial crisis, loans with higher DTI ratios are historically
associated with higher levels of early delinquency, which, in turn, is
indicative of the lack of ability to repay at origination.\72\ The
Report also found that, overall, inclusion of a DTI limit in the
General QM loan definition appears to have reduced the number of loan
originations with DTI ratios above 43 percent and increased the number
with DTI ratios at or just below the limit.\73\ In addition, the Report
found that a robust market for non-QM loans above the 43 percent DTI
limit has not materialized as the Bureau had predicted when it
promulgated the Rule.\74\ The Report also noted recent academic
research indicating that DTI limits can have broader housing market
effects, potentially decreasing house price fluctuations and the
resulting borrower responses to pricing corrections.\75\
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\72\ Assessment Report, supra note 33, at 83-84, 100-05.
\73\ Id. at 115-47.
\74\ Id. at 198.
\75\ Id. at 99-100. Respondents to the Bureau's Assessment RFI
noted that high-DTI lending can lead to house price booms.
Respondents also observed that the General QM loan DTI limit of 43
percent may help constrain such house price growth, but such effects
likely have been diluted by the Temporary GSE QM loan provision's
allowance of DTIs above 43 percent. See Lynn Fisher, Norbert Michel,
Tobias Peter & Edward J. Pinto, Analysis of the BCFP's (CFPB's)
temporary Qualified Mortgage category announced in January 2013,
commonly known as the ``Patch'' (Mar. 1, 2019), https://www.aei.org/publication/analysis-of-the-bcfps-cfpbs-temporary-qualified-mortgage-category-announced-in-january-2013-commonly-known-as-the-patch.
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In adopting a DTI limit in the January 2013 Final Rule, the Bureau
acknowledged arguments that residual income--generally defined as the
monthly income that remains after a consumer pays all personal debts
and obligations, including the prospective mortgage--may be a better
measure of repayment ability in the long run. The Bureau concluded,
however, that it lacked sufficient evidence to prescribe a bright-line
rule based on residual income.\76\ Some stakeholders have continued to
suggest that residual income, rather than DTI ratio, should be used in
the General QM loan definition. Other stakeholders have suggested
combining a higher DTI ratio with a requirement that creditors also
consider residual income.\77\ The Bureau has authority under TILA to
prescribe regulations requiring creditors to consider such alternative
measures of ability to repay as part of the General QM loan
definition.\78\
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\76\ 78 FR 6408, 6528.
\77\ See Eric Kaplan, Michael Stegman, Phillip Swagel & Theodore
Tozer, Milken Institute, A Blueprint for Administrative Reform of
the Housing Finance System, at 17 (Jan. 2019), https://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Blueprint-Admin-Reform-HF-System-1.7.2019-v2.pdf (suggesting that
the Bureau both (1) expand the 43 percent DTI limit to 45 percent to
move market share of higher-DTI loans from the GSEs and FHA to the
non-agency market, and (2) establish a residual income test to
protect against the risk of higher-DTI loans).
\78\ 15 U.S.C. 1639c(b)(3); 15 U.S.C. 1639c(b)(2)(A)(vi).
---------------------------------------------------------------------------
a. Assuming without deciding that, in addition to the statutory
factors, the Bureau retains as part of the General QM loan definition a
criterion that directly measures a consumer's personal finances, should
the Bureau continue to include only a DTI limit, or should the Bureau
replace or supplement the DTI limit with another method (e.g., residual
income or another method)? If so, which method and why? The Bureau
requests that commenters provide data and analysis to support their
views about the use of DTI, residual income, or any suggested
alternatives that directly measure a consumer's personal finances.
b. Assuming without deciding that the Bureau retains a DTI limit as
part of the General QM loan definition, should the limit remain 43
percent? Should the Bureau increase or decrease the DTI limit to some
other percentage? Should the Bureau grant QM status to loans
[[Page 37161]]
with DTI ratios above a prescribed limit if certain compensating
factors are present? \79\ The Bureau requests that commenters provide
data and analysis to support their views about the optimal DTI limit if
the Bureau were to retain a DTI limit as part of the General QM loan
definition.
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\79\ For example, typical required compensating factors for GSE
loans with DTIs above 45 percent include twelve months of cash
reserves for the borrower and a maximum LTV ratio of 80 percent. See
Assessment Report, supra note 33, at 98 n.233. See also U.S. Dep't
of the Treasury, A Financial System that Creates Economic
Opportunities: Banks and Credit Unions, at 99 (June 2017), https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf (revised QM loan requirements should
permit higher DTI loans with compensating factors).
---------------------------------------------------------------------------
c. Assuming without deciding that the Bureau retains a criterion
that directly measures a consumer's personal finances--DTI ratio,
residual income, or some other measure--the Bureau is considering what
standards creditors should be permitted or required to use to calculate
and verify debt and income. Currently, Appendix Q provides these
standards. Appendix Q incorporates FHA's guidelines as they existed
when the January 2013 Final Rule was developed (i.e., FHA's 2011
Guidelines). The Bureau intended for Appendix Q to provide creditors
with certainty about whether they had calculated a loan's DTI ratio in
a way that the Bureau or a court would accept, so that the loan's
compliance with the General QM loan definition's DTI limit could be
ensured. Based on extensive public feedback and its own experience, the
Bureau recognizes that Appendix Q's methods for documenting debt and
income can be rigid, that its provisions for determining what debt and
income can be included in DTI calculations can be difficult to apply,
and that it does not provide the level of compliance certainty that the
Bureau anticipated. Stakeholders have reported that these documentation
and determination concerns are particularly acute for self-employed
consumers, consumers with part-time employment, and consumers with
irregular or unusual income streams.
i. Assuming without deciding that the Bureau retains a criterion
that directly measures a consumer's personal finances--DTI ratio,
residual income, or some other measure--should creditors be required to
continue using Appendix Q to calculate and verify debt and income?
Should the Bureau replace Appendix Q? If the Bureau retains Appendix Q,
how should it be changed or supplemented? The Bureau requests that
commenters provide data and analysis to support their views about any
suggested changes to Appendix Q.
ii. If the Bureau does not retain Appendix Q or permits use of an
alternative, what standard should the Bureau require or permit
creditors to use to calculate and verify debt and income? Should the
Bureau specify in Regulation Z an existing version of a widely used
method of calculating and verifying debt and income that creditors
would be required to use? Or, to provide flexibility to creditors,
should the Bureau combine a general requirement to use a ``reasonable
method'' with the option to use, as a safe harbor, a specified,
existing version of a widely used method for calculating and verifying
debt and income? If the Bureau were to specify an existing version of a
widely used method for calculating and verifying debt and income under
either of the approaches described in this paragraph, which method (or
methods) should be allowed? Should Appendix Q be one of them? The
Bureau requests that commenters provide data and analysis to support
their views about the appropriate approach to calculating and verifying
debt and income.
2. Alternatives to Direct Measures of a Consumer's Personal Finances
The purpose of TILA's ATR requirement is to ensure that consumers
are offered and receive residential mortgage loans on terms that
reasonably reflect their ability to repay the loans and that are
understandable and not unfair, deceptive, or abusive.\80\ The ATR/QM
Rule sought to achieve this purpose, in part, by including a DTI limit
in the General QM loan definition. Some stakeholders have suggested
that the Bureau rely on the statutory QM loan restrictions only (i.e.,
prohibitions on certain loan features, requirements for underwriting,
and a limitation on points and fees) to define a General QM loan.\81\
Others have argued that the General QM loan definition should
incorporate counter-cyclical limits, such as LTV ratio, that become
more restrictive as housing prices increase.\82\
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\80\ 15 U.S.C. 1639b(a)(2).
\81\ See Edward DeMarco, Three Ways to Draw Private Capital Back
into Mortgages, Am. Banker (June 14, 2019), https://www.americanbanker.com/opinion/three-ways-to-draw-private-capital-back-into-mortgages.
\82\ See Fisher et al., supra note 75, at 34.
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Still other stakeholders have suggested that the Bureau rely on
factors that do not directly measure a consumer's personal finances
because such factors may be more predictive of default than DTI or
other direct measurements. For example, one stakeholder has suggested
that the Bureau eliminate the DTI criterion and provide a QM safe
harbor to a loan if the difference between the loan's annual percentage
rate (APR) and the average prime offer rate (APOR) for a comparable
first-lien transaction--i.e., the rate spread--is less than 150 basis
points, as long as the loan also meets the statutory QM criteria.\83\
This stakeholder states that mortgage rates reflect credit risk more
holistically than DTI ratios and that a rate-spread approach would
encourage innovation in the high-DTI loan market.
---------------------------------------------------------------------------
\83\ See Karan Kaul & Laurie Goodman, Urban Inst. Hous. Fin.
Pol'y Ctr., Updated: What, If Anything, Should Replace the QM GSE
Patch, at 6-7 (Oct. 2018), https://www.urban.org/research/publication/updated-what-if-anything-should-replace-qm-gse-patch.
---------------------------------------------------------------------------
Similarly, another stakeholder has suggested eliminating the DTI
criterion for certain loans, depending on their pricing.\84\ Under such
an approach, for example, a loan with a rate spread of: (1) Less than
150 basis points over APOR would receive a QM safe harbor regardless of
DTI ratio, as long as the loan met the statutory QM criteria; (2)
between 150 and 300 basis points over APOR would receive a QM
rebuttable presumption regardless of DTI ratio, as long as the loan met
the statutory QM criteria; \85\ and (3) 300 basis points or more over
APOR would receive a QM rebuttable presumption only if the DTI ratio
did not exceed 43 percent and the loan met the statutory QM criteria.
This stakeholder suggests that near-prime loans with high DTI ratios
can still perform well, rendering it unnecessary to impose a DTI limit
on these loans. By contrast, according to this stakeholder, because
higher-rate loans pose greater risks to consumers, it is critical to
include a DTI threshold for such loans. Loans with improperly
calculated DTI ratios would lose their QM status, thus exposing lenders
to liability; to minimize that risk, lenders would be careful when
originating such loans.
---------------------------------------------------------------------------
\84\ See generally Eric Stein & Michael Calhoun, Ctr. for
Responsible Lending, A Smarter Qualified Mortgage Can Benefit
Borrowers, Taxpayers, and the Economy (July 2019), https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-a-smarter-qualified-mortgage-july2019.pdf.
\85\ A slight variation would require a lender originating a
loan in this category to use a validated underwriting model with
statistically-predictive compensating factors, including DTI or
residual income, in order for the loan to obtain QM status. See id.
at 12.
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Others have suggested that the Bureau amend the Rule so that any
performing loan that has been on a financial institution's books for at
least two years (or some slightly longer time frame) would
automatically convert to a QM
[[Page 37162]]
loan.\86\ These stakeholders argue that, when a loan defaults after
performing for two or three years, it is not reasonable to conclude
that the default was caused by the creditor's failure to consider the
consumer's ability to repay.
---------------------------------------------------------------------------
\86\ See, e.g., Norbert Michel, The Best Housing Finance Reform
Options for the Trump Administration, Forbes (July 15, 2019),
https://www.forbes.com/sites/norbertmichel/2019/07/15/the-best-housing-finance-reform-options-for-the-trump-administration/#4f5640de7d3f.
---------------------------------------------------------------------------
Another possibility would be to require creditors to consider other
credit risk factors, such as credit score or LTV ratio, in lieu of DTI
ratio. The rationale for such an approach would be similar to the
rationale for the pricing-based approaches already discussed. That is,
because credit risk factors such as credit score and LTV ratio are
predictive of default, they arguably are more useful criteria than DTI
for determining whether a loan will be repaid.\87\
---------------------------------------------------------------------------
\87\ See, e.g., Assessment Report, supra note 33, at 100 n.239.
---------------------------------------------------------------------------
a. The Bureau requests comment on whether standards that do not
directly measure a consumer's personal finances are consistent with,
and further TILA's purpose of, ensuring that consumers are offered and
receive residential mortgage loans on terms that reasonably reflect
their ability to repay the loans. The Bureau requests that commenters
provide data and analysis to support their views.
b. The Bureau requests comment on the advantages and disadvantages
of such standards relative to standards that directly measure a
consumer's personal finances, including DTI ratio and residual income.
The Bureau requests that commenters provide data and analysis to
support their views.
c. Assuming without deciding that the Bureau were to adopt
standards that do not directly measure a consumer's personal finances,
should the Bureau retain the current line separating safe-harbor and
rebuttable-presumption QMs or modify it and, if so, how? The Bureau
requests that commenters provide data and analysis to support their
views.
d. The Rule currently provides that a consumer may rebut the
presumption of compliance only by proving that, based on the
information available to the creditor at the time of consummation, the
consumer lacked sufficient residual income to meet living expenses,
including any recurring and material non-debt obligations of which the
creditor was aware.\88\ Assuming without deciding that the Bureau were
to adopt standards that do not directly measure a consumer's personal
finances, should the Bureau further specify or clarify the grounds on
which the presumption of compliance can be rebutted? The Bureau
requests that commenters provide data and analysis to support their
views.
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\88\ 12 CFR 1026.43(e)(1)(ii)(B).
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B. Other Temporary GSE QM Loan Issues
1. The Temporary GSE QM loan provision will remain in effect until
the earlier of January 10, 2021, or the date that the GSEs exit
conservatorship.\89\ To minimize disruption to the mortgage market when
the Temporary GSE QM loan provision expires, should the Bureau consider
any other changes to Regulation Z's ability-to-repay and qualified
mortgage provisions (i.e., other than changes discussed in response to
prior questions)? The Bureau requests that commenters provide data and
analysis to support their views.
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\89\ 12 CFR 1026.43(e)(4)(iii)(B).
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2. The Bureau recognizes that industry will need time to change its
practices to respond to the expiration of the Temporary GSE QM loan
provision and any changes the Bureau makes to the General QM loan
definition. To conduct an orderly rulemaking process and to smooth the
transition to any new General QM loan definition, the Bureau requests
comment, with supporting data, on how much time industry would need to
change its practices following the issuance of a final rule with such a
new definition. If the answer depends on how the Bureau revises the
definition, the Bureau requests answers based on alternative possible
definitions.
Dated: July 25, 2019.
Kathleen L. Kraninger,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2019-16298 Filed 7-30-19; 8:45 am]
BILLING CODE 4810-AM-P
