An industrial group urges the CFPB to remove the DTI thresholds from the quality management rule

Goodbye, DTI?

Major industry player urges CFPB to remove DTI requirements from its qualified mortgage rule once the “QM patch” ends in 2021. According to its data, DTI “is a weaker predictor of default than other risk measures. And “its central place in the current rule of quality management distorts the market by distorting true loan risk”.

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A chance to make a change

The statements come from a comment letter issued by the Urban Institute to the Consumer Financial Protection Bureau last week. Urban Institute, a nonprofit economic and social policy research firm, says QM patch expiration in 2021 is “an opportunity to update the qualified mortgage rule to make it work better for future borrowers “.

Basically, the QM patch allows borrowers to exceed the DTI Qualified Mortgage Rule Threshold (43%) on loans guaranteed by Fannie Mae and Freddie Mac. The CFPB has announced that it does not intend to extend the exception once it expires in January 2021.

“The readjustment of the domestic mortgage market outside of the patch may facilitate a more transparent and level playing field that ultimately benefits consumers through stronger consumer protection,” CFPB director Kathleen Kraninger said in July.

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Elimination of DTI requirements

Urban Institute policy experts seem to agree. In fact, they think a post-patch QM rule should completely remove DTI thresholds.

“As a one-dimensional variable, the DTI ratio by itself does not capture credit risk comprehensively,” says the Institute’s comment letter. “We have shown that FICO scores and loan-to-value ratios better predict default than DTI ratios. “

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According to the Institute, credit spreads are a better predictor of default than DTI and predict it “with greater precision”.

Other industry players have agreed to eliminate DTI as a stand-alone test, including the Mortgage Bankers Association and the AEI Housing Center.

Check your new rate (Oct 31, 2021)

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Are you planning to buy a house? Then shop around and see what mortgage rate DTI qualifies you for today.

Check your new rate (Oct 31, 2021)

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