February 4, 2013
Attorney Robert Barnett asks whether the CFPB’s new Ability-To-Pay Rule is too rigid. He says that ‘the insistence on a solid 43 percent debt-to-income ratio will exclude many very solid applications from qualification as a Qualified Mortgage . . ..” (1) He also argues that LTV and credit scores are more reliable predictors of default and that there is no reason to trump them with a firm debt-to-income limitation. Barnett cites a study from the Housing Policy Council that indicates that loan volume would drop more than 18 percent when DTIs were reduced from a range of 44 to 46 percent to a range of 40 to 42 percent. This drop in loan volume was accompanied by a relatively modest drop in the default rate from 1.59 percent to 1.43 percent.
I can’t speak to the merits on this, but it does raise an important question: what mechanisms are in place at the CFPB to go back and test such rules to ensure that they are appropriately balancing consumer protection with consumer opportunity.