That’s the Spirit: The Haunting of the CFPB’s GSE Patch
On October 20, 2020, the Consumer Financial Protection Bureau (the Bureau) issued a final rule extending the Government-Sponsored Enterprise (GSE) Patch until the Bureau’s general qualified mortgage (QM) changes kick in. To keep from spooking the residential mortgage markets, the Bureau’s final rule accomplishes three main objectives:
- Retains the temporary GSE qualified mortgage (QM) safe harbor until compliance with the Bureau’s revised general QM definition becomes mandatory, but without any overlap period as some commenters requested;
- Establishes an implementation period to facilitate the transition to the revised general QM loan definition, and suggests the adoption of an “optional early compliance period” for transitioning to the revised general QM before the mandatory compliance date; and
- Resolves the frightful gap the Bureau’s proposal threatened to create by terminating the GSE Patch in accordance with the date of loan application, as opposed to the date of loan consummation.
For those who have been cowering in the shadows, the GSE Patch refers to a temporary compliance safe harbor the Bureau granted in 2014 for loans eligible for purchase by Fannie Mae or Freddie Mac. Those GSE-eligible loans have been deemed to comply with federal ability-to-repay requirements applicable to closed-end residential mortgage loans. The GSE Patch grants QM status to certain loans excluded by the general QM definition – notably, loans with a debt-to-income ratio that exceeds 43%. The GSE Patch is set to expire on January 10, 2021, or when the GSEs are released from conservatorship, whichever occurs first. The Bureau is otherwise revising its general QM definition, in part to ensure that the Patch expiration does not deprive worthy borrowers of access to credit.
In establishing the end date for the GSE Patch, the Bureau’s final rule first clarifies that there will not be an “overlap period.” The Bureau proposed to extend the effectiveness of the temporary GSE QM exemption/definition beyond the January 10 deadline and up until the effective date of the Bureau’s revisions to the general QM definition. However, in the Bureau’s final rule, it instead linked the temporary GSE QM definition expiration date to the mandatory compliance date of the revisions to the general QM definition.
The Bureau stated that an overlap period would keep the temporary GSE QM definition in place longer than necessary, further hampering the development of a private capital market for mortgages. Rather than an after-the-fact overlap period, the Bureau may establish a before-the-fact “implementation period” to facilitate the transition from the GSE Patch to the newly revised general QM definition.
Second, the Bureau plans to adopt an “optional early compliance period,” during which creditors could begin originating loans under the revised general QM loan definition in advance of the GSE Patch expiration. This too, according to the Bureau, would help accommodate a smooth transition from the Patch without undue delay.
Third, as mentioned above, the Bureau addressed a potential gap in coverage. The Bureau’s proposal would have created a period during which neither the temporary GSE QM definition nor the newly revised general QM definition would apply. Under the proposal, the GSE Patch was set to expire for loans consummated on or after the final rule’s effective date. However, the revised general QM definition would not yet have been available, because it was set to kick in only for loans applied for on or after the effective date.
Since the Bureau decided against an overlap period during which both QM categories would be available, the Bureau resolved the gap issue by permitting creditors to rely on the date of loan application for both the expiration of the GSE Patch and the initiation of the new general QM definition. Therefore, the Patch will still be in place for a loan for which the borrower applies before the mandatory compliance date, even if the loan is consummated after that date.
In response to comments on the proposal, the Bureau rejected calls to align the expiration of the temporary GSE QM “with the General QM Proposal based on the date of consummation of mortgages,” which, according to the Bureau, would create uncertainty.
Lastly, the Bureau’s final rule retains the condition that the temporary GSE QM loan definition will expire early if the GSEs exit conservatorship before the mandatory compliance date.
The Bureau ghosted us with regard to when it expects mandatory compliance date will be or for how long the GSE Patch will continue its haunt. The Bureau merely restated its prediction from the proposed rule that the final rule amending the general QM loan definition would not likely take effect before April 1, 2021.
