The Qualified Mortgage (QM) Rule and the QM Patch
January 23, 2020
The Qualified Mortgage (QM) Rule and the QM Patch
Background
If a loan satisfies the requirements for QM status, the lender
On January 30, 2013, the Consumer Financial Protection
receives a presumption of ATR compliance for legal
Bureau (CFPB) released a final rule implementing the
purposes. Specifically, QM loans provide safe harbor legal
ability-to-repay (ATR) requirement of the Dodd-Frank Wall
protection, meaning that a borrower would not be able to
Street Reform and Consumer Protection Act (Dodd-Frank
assert that the originator (and any subsequent secondary-
Act; P.L. 111-203). For residential mortgage originations,
market purchaser) failed to comply with any of the required
the Dodd-Frank Act includes in the ATR requirement that
underwriting criteria.
lenders consider and verify with documentation eight
underwriting criteria for the borrower: (1) current or
QM Exemptions and the QM Patch
reasonably expected income or assets; (2) current
If a loan’s DTI exceeds 43%, it may still receive QM status
employment status; (3) monthly payments of principal and
if guaranteed by the Federal Housing Administration, U.S.
interest on the primary mortgage lien; (4) monthly payment
Department of Veterans Affairs, or U.S. Department of
on any junior mortgage lien; (5) monthly payment for
Agriculture. Rather than limit DTIs to 43% for the
mortgage-related obligations (e.g., property taxes,
mortgages they guarantee, these federal agencies adopted
homeowner association fees); (6) any additional debt (e.g.,
their own QM definitions that still exclude product features
automobile, credit card, education) obligations; (7) monthly
they consider would impede repayment from borrowers
debt-to-income ratio or residual income; and (8) credit
they predominantly serve.
history. The rule became effective on January 10, 2014.
The CFPB’s QM patch created an exemption from the 43%
The final ATR rule provides multiple ways for a loan
DTI cap for mortgages eligible for purchase by the
originator to comply, one of which is by originating a
government-sponsored enterprises (GSEs), Fannie Mae and
qualified mortgage (QM). A mortgage loan that receives
Freddie Mac. Hence, the GSEs may purchase loans with
QM status must meet certain product-feature and
DTIs exceeding 43% and still receive QM status. The QM
underwriting requirements:
patch was put into effect for seven years (until January 10,
2021) or until the GSEs exit conservatorship, whichever
The mortgage must fully amortize, meaning that the
occurs sooner.
borrower’s payments must be applied toward paying
down a portion of the principal loan balance over time.
Recent Developments
A QM generally cannot have a balloon or large principal
As the private-label securitizations market has declined
payment due at the end of the loan. Furthermore, a QM
over several years, the federal agencies that guarantee
loan cannot negatively amortize, meaning that the
residential mortgage loans have increased in importance.
principal loan balance may not increase over time.
The GSE’s QM patch has also increased in importance,
accounting for approximately 16% of 2018 total mortgage
The borrower’s debt-to-income (DTI) ratio must not
originations. One reason might be related to the legal
exceed 43%. The DTI is defined as total monthly
protections linked to QM loan originations. Many
(housing and nonhousing) expenses divided by gross
originators have limited themselves to making only QM
monthly income. Monthly housing expenses include
loans to avoid exposure to potential liability and litigation
principal, interest, taxes, insurance, and homeowner
risks. Originators that continue to offer non-QM loans
association fees. Monthly nonhousing expenses include
reportedly charge higher rates to offset potential legal and
other consumer loan payments and other regularly
compliance risks.
scheduled obligations (e.g., child care, utility bills).
When both housing and nonhousing expenses are
In January 2019, the CFPB released an assessment report of
included, this computation is specifically referred to as
the ATR and QM rule, which reached conclusions similar
the back-end DTI ratio.
to those reported by private-sector researchers. Among
numerous findings, the CFPB reported that the approval
For a QM loan, the difference between the annual
rates for non-QM high-DTI applicants declined across all
percentage rate (APR) and the average prime offer rate
credit tiers and income groupings since the QM rule took
(APOR) must be less than 1.5% for a first lien and 3.5%
effect, possibly as a result of lenders’ wanting to avoid
for a junior lien. The APR includes both the annual
litigation risks. In addition, the CFPB found that borrowers
interest cost and upfront fees spread over the life of the
applying for loans eligible for purchase or guarantee by one
mortgage and expressed as a percentage; the APOR is a
of the GSEs or federal agencies were less affected by the
weekly average of the market rates and points (upfront
QM rule. The CFPB also found that the GSEs may have
fees) found in the Primary Mortgage Market Survey
loosened their underwriting requirements for high-DTI
conducted by Freddie Mac.
borrowers.
https://crsreports.congress.gov
The Qualified Mortgage (QM) Rule and the QM Patch
On July 25, 2019, the CFPB issued an Advance Notice of
the Truth in Lending Act (Regulation Z),” 78 Federal
Proposed Rulemaking, proposing to allow the QM patch to
Register 6408-6620, January 30, 2013.
expire on January 10, 2021. If the QM patch expires,
whether the GSEs would purchase non-QM loans in the
CFPB, “Consumer Financial Protection Bureau Releases
future is unclear. Financial institutions historically have
Qualified Mortgage ANPR,” at
been less willing to assume potentially costly legal risks.
https://www.consumerfinance.gov/about-us/newsroom/
For example, after the Georgia Anti-Predatory Lending Act
bureau-releases-qualified-mortgage-anpr/.
of 2002 was passed, the GSEs announced that they would
no longer purchase mortgages originated in the State of
CFPB, Ability-to-Repay and Qualified Mortgage Rule
Georgia to avoid the legal risk of assignee liability.
Assessment Report, January 2019, at
Likewise, the GSEs could limit their purchases to QMs or,
https://files.consumerfinance.gov/f/documents/cfpb_ability-
alternatively, they could charge higher fees to offset
to-repay-qualified-mortgage_assessment-report.pdf.
potential legal and compliance risks like the private-sector
originators that continue to offer non-QM loans.
Department of Housing and Urban Development,
“Qualified Mortgage Definition for HUD Insured and
Alternative Metrics for Consideration
Guaranteed Single Family Mortgages,” 78 Federal Register
Generally speaking, a main goal of the Dodd-Frank Act was
75215-75238, December 13, 2013.
to promote the financial stability of the United States.
Along with capital requirements and other prudential
Department of Veterans Affairs, “Loan Guaranty: Ability-
regulations for financial institutions, a DTI requirement can
To-Repay Standards and Qualified Mortgage Definition
also be viewed as a macroprudential policy tool that may
Under the Truth in Lending Act,” 79 Federal Register
reduce a financial system’s vulnerability to payment
26620-26628, May 9, 2014.
disruptions and systemic panics.
Department of Agriculture, Rural Housing Service, “Single
If a DTI requirement is considered to be a useful
Family Housing Guaranteed Loan Program,” 81 Federal
macroprudential policy tool, it is possible that the front-end
Register 26461-26465, May 3, 2016.
DTI could be used rather than the back-end DTI. The front-
end DTI consists only of the monthly housing expenses
Mortgage Bankers Association, “ATR/QM Issues,” at
divided by monthly gross income. Thus, it is less restrictive
https://www.mba.org/advocacy-and-policy/residential-
than the back-end DTI and could result in greater credit
policy-issues/cfpb-consumer-laws-and-regulations/atr/qm-
access for some creditworthy borrowers. For example,
issues.
suppose renters (using their monthly rents in the
calculation) have back-end DTIs exceeding 43%, yet they
Karan Kaul and Laurie Goodman, What, If Anything,
have demonstrated the ability to meet their monthly
Should Replace the QM GSE Patch? Urban Institute, at
expenses. In this case, renters who apply for mortgages
https://www.urban.org/sites/default/files/publication/98949/
arguably should not be denied if their total monthly
qualified_mortgage_rule.pdf.
payment obligations with a mortgage would be relatively
similar. For this reason, the front-end DTI may be a
Karan Kaul, Laurie Goodman, and Jun Zhu, Comment
sufficient indicator of housing affordability while also
Letter to the Consumer Financial Protection Bureau on the
satisfying a macroprudential policy goal. Depending upon
Qualified Mortgage Rule, Urban Institute, September 17,
borrower circumstances, lenders traditionally consider
2019, at https://www.urban.org/research/publication/
acceptable front-end DTIs to range from 28% to 41%.
comment-letter-consumer-financial-protection-bureau-
qualified-mortgage-rule.
Another alternative to the back-end DTI is the loan-to-value
(LTV) ratio, defined as the outstanding mortgage balance
Pete Carroll, Expiration of the CFPB’s Qualified Mortgage
divided by the current residential property value. Some
“GSE Patch”—Part 1, CoreLogic, at
academic policy research has found that the back-end DTI
https://www.corelogic.com/blog/2019/07/expiration-of-the-
ratio may be a less reliable predictor of single-family
cfpbs-qualified-mortgage-gse-patch-part-1.aspx.
borrower default than the LTV. If macroprudential stability
is the goal, the determination of mortgage eligibility
Tobias Adrian et al., Macroprudential Policy: A Case Study
arguably should be linked to a ratio that is a more reliable
From a Tabletop Exercise, Federal Reserve Bank of New
predictor of default.
York, February 1, 2017, at https://www.newyorkfed.org/
medialibrary/media/research/epr/2016/epr_2016-adrian-
If Congress desired to replace the back-end DTI with any
macroprudential-policy.pdf?la=en.
alternative metric(s), it may require statutory change. The
Dodd-Frank Act requires the regulator to use specific
CRS Report R45828, Overview of Recent Administrative
metrics that are informative about the ability to repay, but it
Reforms of Fannie Mae and Freddie Mac, by Darryl E.
may not necessarily provide the CFPB with the flexibility
Getter.
to substitute metrics that may better predict loan default.
Additional Resources
Darryl E. Getter, Specialist in Financial Economics
Bureau of Consumer Financial Protection (CFPB),
IF11413
“Ability-to-repay and Qualified Mortgage Standards under
https://crsreports.congress.gov
The Qualified Mortgage (QM) Rule and the QM Patch
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