Operational and quality control issues
The industry leader stated that the DTI ratio is not a strong indicator of a borrower’s ability to repay, and an LLPA based on this ratio would cause difficulties in compliance and bring added complexity to the loan application and underwriting process.
“MBA is particularly concerned about the addition of an LLPA for loans with a debt-to-income ratio greater than 40% and recommends removing it from the enterprises’ pricing framework,” Broeksmit said in a letter addressed to FHFA director Sandra Thompson. “The reasons for introducing DTI ratio in the enterprises’ pricing framework remain unclear. The general qualified mortgage definition was revised to exclude DTI ratio as studies demonstrate that as a stand-alone measure, DTI ratio is not a strong indicator of a borrower’s ability to repay. Further, an LLPA tied to DTI ratio poses a multitude of operational issues and subsequent quality control concerns for lenders.
He explained that a borrower’s income and expenses could change several times throughout the loan application and underwriting process, especially considering the nature of debt and income and the growth in self-employment, part-time employment, and gig economy employment.
“These changes in income and expenses can cause the DTI ratio to fluctuate as items of income and expense disclosed during the application process are later verified during underwriting, which could now result in multiple changes to a borrower’s loan pricing,” Broeksmit said. “Such pricing changes may result in difficult compliance challenges as lenders are forced to evaluate if such changes constitute a valid change in circumstance under TRID, potentially requiring redisclosures and delays in the closing process. In addition to the added level of complexity and scrutiny the DTI ratio LLPA brings to income and expense calculation, lenders are concerned multiple pricing changes could jeopardize borrower trust and lead to the appearance of a ‘bait and switch’ when offering loan pricing.”
Broeksmit added that these changes, coming at the peak of the spring homebuying season in May, will raise costs for borrowers and impose significant operational challenges for the industry. The timing is “especially troubling given current stressed housing market conditions already making affordability a challenge,” he said.