GSE Patches, We’re Depending on You

The CFPB estimates that approximately 16% of all first-lien mortgage loans are made under the GSE patch.  That is nearly a million loans per year made under this temporary Reg Z provision.

Back in June 2020 the CFPB issued two Notices of Proposed Rulemaking in which they sought to 1) extend the sunset/expiration date of the GSE patch, and 2) revise the definition of a qualified mortgage. 

The GSE patch has a built-in sunset/expiration provision of whenever the GSEs exit federal conservatorship or January 10, 2021, whichever comes first.  In October 2020, the CFPB issued the first of these rules, the final rule to extend the sunset/expiration provision of the GSE patch.

This final rule extends the sunset/expiration date for the GSE patch QMs, while not disturbing the existing provision that the GSE patch will expire when the GSEs exit conservatorship.  Under this final rule, the GSE patch will expire on the earlier of: 1) the date that the GSEs exit conservatorship , or 2) the mandatory compliance date specified in the yet to be published final rule which will revise the qualified mortgage definition.  So, the GSE patch QMs will continue to live on beyond January 10, 2021, but for exactly how long is unclear.  As long as the GSEs continue under conservatorship, lenders will have to wait for the CFPB’s general QM revision rule to start the clock on the expiration of the GSE patch QM rules.

This GSE patch final rule does not affect FHA, VA or USDA qualified mortgages.  Additionally, the expiration of the GSE patch QM will not affect the QM status of a loan if the loan was made or the loan application was received before the extended sunset/expiration date, and the loan will be a QM for the remainder of the loan’s term.

For a little background on qualified mortgages and the GSE patch, after Dodd-Frank’s established the ability-to-repay (ATR) requirements and qualified mortgage requirements, the CFPB issued the ATR/QM rule.  This rule created categories of QM loans, including the general QM and the temporary GSE QM (GSE patch), with the GSE patch giving lenders the flexibility to make loans to individuals who do not meet all of the general QM requirements.

The general QM has, among other requirements, a prohibition against balloon payments, a prohibition of a loan term greater than 30 years and a requirement that the borrower’s debt-to-income ratio (DTI) not exceed 43%. However, as was previously mentioned, nearly 16% of all first-lien mortgage borrowers in the U.S. have a DTI that exceeds 43%, creating the need for the GSE patch.

The GSE patch QMs are loans that comply with certain specified general QM requirements and are also eligible for purchase by Fannie Mae or Freddie Mac (collectively, the GSEs).  Under the GSE patch provision, a loan can still be a QM even if the borrower’s DTI exceeds 43%, as long as the borrower meets the GSE’s requirements and underwriting criteria.  In addition, income and debt for these loans are generally verified using GSE standards, rather than the Appendix Q standards used for the general QM.

This October 2020 final rule is effective on December 28, 2020.  For additional information on the proposed revisions to the definition of qualified mortgage and the final changes to the GSE patch, see the CFPB’s Executive Summary of the October 2020 Rule, the October 2020 GSE patch extension final rule, as well as the CFPB’s June 2020 Notice of Proposed Rulemaking.