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Who Should Qualify for a Mortgage? Banks, CFPB Disagree

What loan application or credit score details can predict future foreclosures? Banks say the QM rule on loan applicants’ debt-to-income ratio should be changed.

WASHINGTON – Four bank giants have formed a coalition to push the U.S. Consumer Financial Protection Bureau (CFPB) into changing its Ability to Repay/Qualified Mortgage rule  (QM rule) and eliminate the debt-to-income ratio requirement. Bank of America, Quicken Loans, Wells Fargo and Caliber Home Loans are leading the call for change.

CFPB created the QM rule following the financial crisis. It requires lenders to verify that a borrower has the ability to repay a mortgage before lending them money. As part of that process, a borrower’s monthly debt-to-income ratio (DTI) must not exceed 43%.

“A debt-to-income ratio by itself cannot accurately determine a credit borrower’s worthiness; rather, a more holistic measure is needed,” according to the National Association of Realtors® (NAR). “Several groups have proposed alternative measures, but more research is needed on all of them. NAR will work with the CFPB toward this goal.”

The DTI requirement doesn’t apply to loans backed by the government, such as through the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Fannie Mae or Freddie Mac. Critics say that gives the GSEs an unfair advantage over private loans – ones that lenders don’t plan to sell to Fannie or Freddie – which must meet the DTI mandate.

However, that may change if Fannie and Freddie lose the protection. The CFPB has said it would allow the QM Patch – the stipulation that allows Fannie and Freddie to bypass that DTI requirement – to expire as scheduled on 2021. The GSEs will then be required to follow the same DTI rule as private lenders.

Fannie Mae and Freddie Mac buy over half the mortgages originated in the U.S. If the patch expires, the DTI requirement would apply to a majority of U.S. homebuyers.

The banks’ coalition efforts have recently been joined by other housing groups – such as the Mortgage Bankers Association, American Bankers Association, and the National Fair Housing Alliance. They’ve sent a letter to the CFPB asking for it to eliminate the 43% DTI cap on prime and near-prime loans. They argue that it’s limiting lending outside of a GSE-backed loan. They also argue that a DTI ratio, on its own merits, is not a reliable indicator of a borrower’s ability to repay.

“Elimination of the DTI requirement for prime and near-prime loans would preserve access to sustainable credit for the new generation of first-time homebuyers in a safe and sustainable way and in accordance with the fundamental ATR requirements,” the group says in its letter to the CFPB. “This change is especially important for reaching historically underserved borrowers, including low- to moderate-income households, and communities of color.”

Source: “Wells Fargo, Bank of America, Quicken Loans, Others Want DTI Requirement Eliminated From QM Lending Rules,” HousingWire (Sept. 10, 2019)

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