The Consumer Financial Protection Bureau Thursday afternoon served official notice that it is seeking comment on a range of issues — including the cost of potential litigation — and whether debt-to-income ratios should be used to determine a borrower’s “ability to repay” a residential loan.
The bureau is seeking data on the relationship between DTI ratios and delinquencies as well as the impact such ratios would have in limiting the number of qualified mortgages.
A few large banks working with consumer groups have developed a bright line test for determining a borrower’s ability to pay. If the borrower has total DTI ratio of 43% or less, the loan would meet all the QM requirements.
The comment period ends July 9. A final rule could be issued by yearend.
On Thursday CFPB published several tables confirming what most mortgage professionals and regulators already knew: the higher the DTI ratio on a mortgage the greater the likelihood it will go delinquent.
However, the tables published by CFPB are culled only from Fannie Mae and Freddie Mac loans and exclude no-do/low-doc mortgages, interest-only loans, negative amortization products, balloons and other nonconforming loan types. (The tables cover the years 1997 to 2009.)
“Through our ability-to-repay rule, we want to ensure that consumers are not set up to fail with mortgages they cannot afford and we want to protect access to affordable credit,” said CFPB director Richard Cordray in a statement. “We are committed to gathering solid data to inform this important rule. This notice gives the public an opportunity to comment on the information we have received so far, as well as an opportunity to submit additional data.”
The Dodd-Frank Act requires lenders to make a reasonable and good-faith assessment of consumers’ ability to repay their mortgages.
As part of the broader ability-to-repay mandate, Congress also designated “qualified mortgages,” which are structurally safer and are underwritten according to standards that make it reasonable to expect that borrowers have an ability to repay.
The notice seeks comment on the data, and requests similar information regarding other types of mortgage loans. It also seeks information on the relationship between ability to repay and other potentially relevant factors such as borrowers’ cash reserves.