The U.S. Treasury Department recently submitted to President Trump an executive report outlining reforms that would align with the President’s core principles for regulating the U.S. financial system issued on Feb. 3, 2017. Specifically, the Treasury wishes to reform the Ability-to-Repay/Qualified Mortgage (ATR/QM rule) that could make mortgage credit accessible to more creditworthy borrowers.
About the ATR/QM Rule
The Dodd-Frank Act contains provisions requiring lenders to assess a borrower’s ability to repay (ATR) his/her loan before making any higher-priced residential mortgage loan. Lenders are presumed to have complied with this ATR rule when making a certain type of mortgages known as Qualified Mortgages (QM). The Consumer Financial Protection Bureau (CFPB) then adopted the ATR/QM rule to implement these provisions of the Dodd-Frank Act.
Under the ATR/QM rule, lenders must consider eight factors in verifying income, employment, credit history, and assets in making a mortgage to a borrower. It also contains characteristics of a QM and provides a safe harbor for non-high-priced loans.
The Treasury, however, has issues with the guidelines incorporated in the ATR/QM rule. “While Dodd-Frank and the ATR/QM rule were not intended to eliminate markets for loans that did not meet the QM standards, the reality is that the vast majority of lenders remain unwilling to make loans that do not meet those standards, eliminating access to mortgages for many creditworthy borrowers.”
What the Treasury Recommends
Consequently, the Treasury makes the following recommendations and supporting reasons as quoted regarding the ATR/QM rule. That the CFPB:
- Align QM requirements with that of the GSEs Fannie Mae and Freddie Mac, and thus phase out the QM Patch, which considers loans that are eligible for Fannie/Freddie purchase as QM loans. ”These requirements should make ample accommodation for compensating factors that should allow a loan to be a QM loan even if one particular criterion is deemed to fall outside the bounds of the existing framework, such as when a borrower has a high DTI ratio with compensating factors.”
- Simplify Appendix Q to offer a clearer and more binding guidance on borrower debt and income levels without being overly prescriptive and rigid. “Review of these requirements should be particularly sensitive to considerations for self-employed and non-traditional borrowers.”
- Revise the cap on points and fees for QM loans. Specifically, the CFPB should increase the existing dollar amount threshold of $103,000 for the application of 3% fees and points cap to encourage lenders to make more smaller-balance loans. “The CFPB should scale points and fees caps in both dollar and percentage terms for loans that fall below the adjusted loan amount threshold for application of the 3% points and cap.”
- Increase the maximum asset threshold for small creditor QM loans from $2 billion to between $5 and $10 billion to accommodate loans made by small depository institutions. “In order to maintain a level playing field across institutions types, an alternative approach to this recommendation would be to undertake a rulemaking to amend the QM rule and related processes for all lenders regardless of type.”
The Treasury also touches on wider reforms to improve the efficiency of bank regulation and provide credit to consumers and businesses to drive economic growth in its report, a full-text copy of which is available here.