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As CFPB prepares to end QM patch, Congress tries to soften the blow

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WASHINGTON — Just as the Consumer Financial Protection Bureau wants to end a regulatory exemption for loans backed by Fannie Mae and Freddie Mac, some lawmakers want to soften the impact of the two companies losing their special treatment.

Under the CFPB’s so-called Qualified Mortgage rule, which requires lenders to assess a borrower’s ability to repay, Fannie and Freddie-backed loans are automatically deemed QM. The bureau said in July that it intends to let the exemption, known as the QM patch, expire with its January 2021 sunset.

But a bill up for consideration by the House Financial Services Committee Wednesday would continue to provide some flexibility for loans backed by the government-sponsored enterprises. The panel will consider the mortgage underwriting bill along with measures dealing with the debt collection industry.

The QM legislation, introduced by Reps. Bill Foster, D-Ill., and Tom Emmer, R-Minn., would give lenders a choice between using Appendix Q, a set of unpopular standards cited by the CFPB for complying with QM’s 43% debt-to-income limit, and guidelines used by Fannie and Freddie for determining debt and income.

“We see this legislation as a de facto extension of the QM Patch,” Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a research note Monday.

Lenders have worried that losing the QM patch will result a credit shortage in housing markets. In July, CFPB Director Kathy Kraninger said that short-term extensions are on the table but that “the top line is the patch is going to expire.”

While the House legislation is considered a long-shot in the divided Congress, analysts say the provision is worth watching as it moves through committee and regulators continue to mull housing finance reform. The CFPB has signaled its intent, along with ending the patch, to weigh changes to the QM rule that may be to the industry’s liking.

Isaac Boltansky, director of policy research at Compass Point Research & Trading, said the legislation was a “messaging bill given the low likelihood of passage and the CFPB’s ongoing review,” but the discussion at markup “warrants watching given CFPB’s efforts to modernize the rule and close the patch.”

In addition to stating its intent to let the patch expire, the CFPB also submitted questions for public comment on revamping the QM rule. The advance notice of proposed rulemaking sought input on several possible amendments, such as revising the definition of “mortgage” under Regulation Z, whether the bureau should change QM to take into account other approaches to assess a borrower’s ability to repay and whether Appendix Q should be replaced.

A companion bill in the Senate to let lenders choose between Appendix Q and the GSE underwriting criteria has been authored by Sens. Mike Rounds, R-S.D., and Mark Warner, D-Va., both members of the Senate Banking Committee.

Even with the Senate unlikely to vote on the legislation, the House bill “still matters,” Seiberg said.

“House passage — especially if it is bipartisan — will give regulators political cover to provide relief from the termination of the QM patch,” he said.

Regulators at the CFPB could incorporate crucial language from Foster’s bill, letting lenders choose between Appendix Q and the standards used by Fannie and Freddie.

Also on the docket for Wednesday’s markup by the Financial Services Committee are various bills related to debt collection. A bill proposed by Rep. Ayanna Pressley, D-Mass., would prevent the CFPB from writing rules allowing debt collectors to send unlimited email and text messages to a consumers.

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