Many of the country’s top lenders and financial associations have been pressuring the Consumer Financial Protection Bureau (CFPB). They have been asking to eliminate the strict debt-to-income (DTI) ratio requirement that is currently part of the Ability to Repay/Qualified Mortgage (QM) rule.
What Are the Current DTI Requirements?
Mortgage loan underwriters must review the borrower’s debts and assets to make sure they are able to repay the loan. Part of this requirement is the QM rule, which includes a stipulation that the borrower’s DTI ratio (how much they owe versus how much they earn) doesn’t exceed 43%.
It should be noted that Fannie Mae and Freddie Mac are currently not bound to the existing DTI requirement. This is a result of a special condition that was instated called the “QM Patch” (or the “GSE Patch”). Therefore, loans which are sold to Fannie Mae or Freddie Mac are actually allowed to exceed the stipulated 43% DTI ratio.
Changing the QM Rule
As you might expect, other big lenders weren’t too happy because it gave Fannie and Freddie an unfair advantage. Banks like Wells Fargo, Bank of America and Quicken Loans were also supported in their claim by financial organizations like the Mortgage Bankers Association, National Fair Housing Alliance, American Bankers Association and even the Federal Housing Finance Agency.
Their efforts seem to have worked. CFPB Director Kathy Kraniger recently sent a letter to several key members of Congress suggesting an amendment to the QM rule. It would essentially make the QM patch apply to all lenders and “move away” from reviewing DTI ratio during the mortgage loan underwriting process.
Exploring the Options
This move is a major shift in direction for the CFPB, which previously stated it was going to get rid of the QM Patch once that provision expired on January 2021. Nothing is set in stone yet, as they are still considering options. They could keep things as they are now by simply extending the existing QM Patch. They could eliminate it altogether and go back to all lenders requiring a minimum DTI ratio. They could amend the QM Rule to completely remove the DTI as part of the underwriting process. Or they could choose lower the required DTI ratio.
There are other options they are considering, as well, and none of these rule changes have been officially proposed by the CFPB yet. This is all just early speculation based on some of the language Kraniger included in her letter.
“While the Bureau is moving forward expeditiously to address the upcoming expiration of the GSE Patch, we recognize that legislation could better accomplish important policy objectives, such as providing clarity on what qualifies as a QM loan, leveling the playing field among lenders, and ensuring consumers still have access to credit,” Kraniger wrote.
Working Toward a Fair Solution
Ultimately, the goal is to have a set of rules that are fair among all lending institutions while still working to protect borrowers. Beyond what the QM Rule requires, each and every lender has their own lending requirements that borrowers must meet to make sure they qualify.
If you are thinking about buying a home, it’s a really good idea to get pre-approved for your mortgage loan rather than just a basic pre-qualification. Contact Transparent Mortgage today to learn more about the process and to apply for a loan pre-approval.