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The Consumer Financial Protection Bureau issued a final rule on Tuesday to extend the Government-Sponsored Enterprise (GSE) Patch, a move that could protect borrowers with high debt-to-income ratios.
Yesterday’s ruling will keep the GSE Patch, which was set to expire on Jan. 10, in place until the CFPB finalizes and implements a new definition for a General Qualified Mortgage (QM). However, if Fannie Mae and Freddie Mac exit conservatorship, the CFPB said in a statement, the GSE Patch will expire.
“In releasing the final rule, the Bureau is taking steps to ensure a smooth and orderly transition away from the GSE Patch and to maintain access to responsible, affordable mortgage credit upon its expiration,” the CFPB said in the statement. “Further, the Bureau is taking this action to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires before the mandatory compliance date of a final rule amending the General QM loan definition.”
The GSE Patch was created after the Dodd-Frank Act amended the Truth in Lending Act (TILA) following the 2008 financial crisis.
TILA established ability-to-repay requirements for most residential mortgage loans and identified factors a creditor must consider in assessing a consumer’s ability to repay. TILA also defined QM loans, which are presumed to comply with the ability-to-repay requirements. The CFPB in 2013 issued an Ability-to-Repay/Qualified Mortgage rule, establishing a general QM standard for loans where the consumer’s debt-to-income (DTI) ratio is 43 percent or less, and that meet other requirements.
The CFPB further created a temporary qualified mortgage definition for certain mortgage loans eligible for purchase or guarantee by the Fannie Mae and Freddie Mac. This temporary definition, known as the GSE Patch, allowed loans to be eligible for QM status even if the DTI ratio exceeded 43 percent.
The CFPB last year found that the temporary GSE QM loans continued to represent a large share of mortgage originations. Before yesterday’s announcement, the GSE Patch was scheduled to expire on January 10 or when the GSEs exit the conservatorship that they have been under since the financial crisis. The CFPB said in a statement that approximately 957,000 mortgage loans would be affected by the expiration of the GSE Patch. Had the patch expired, many of these loans would either not be made or would be made at a higher price, the CFPB said.
The CFPB is currently developing a new definition for General QM loans after issuing a proposal in June. In yesterday’s statement, the CFPB said it planned to issue a final rule with the new definition at a later date. It is also working on a proposal to create a new category of QMs (Seasoned QMs).
