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The Consumer Financial Protection Bureau says it wants to eliminate the debt-to-income test from its qualified mortgage lending rules.

The test was created by the CFPB under the aegis of the Dodd-Frank Act in the wake of the 2008 financial crisis. Loans issued to borrowers with debt-to-income ratios, or DTIs, above 43 percent, do not qualify for litigation protections under the Truth in Lending Act. If a lender makes a loan to someone with a DTI higher than 43 percent and that borrower defaults, the lender can be sued for failing to make sure the borrower had the ability to make their monthly payments. The rule does not apply to FHA-, VA- or USDA-backed mortgages.

The CFPB also created a temporary qualified mortgage definition for certain mortgage loans eligible for purchase or guarantee by the government-sponsored entities (GSEs), Fannie Mae and Freddie Mac. This temporary definition, known as the GSE Patch, allowed loans to be eligible for QM status even if the DTI ratio exceeded 43 percent.

The CFPB last year found that the temporary GSE QM loans continued to represent a large share of mortgage originations. The GSE Patch is scheduled to expire on January 10, 2021, or when the GSEs exit the conservatorship that they have been under since the financial crisis. The CFPB said in a statement that approximately 957,000 mortgage loans would be affected by the expiration of the GSE Patch. After the patch expires, the CFPB said, many of these loans would either not be made or would be made at a higher price.

The CFPB issued two proposals on Monday to address the issue. One would no longer use the DTI limit when determining whether a loan is eligible for QM status.

In place of DTI, a loan’s eligibility for QM status would be determined using a price-based approach. Comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction would be “a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone,” the CFPB said.

If the loan’s APR exceeds the average prime offer rate by less than 2 percentage points, the loan would quality for QM status. Smaller loans would have higher thresholds, which the CFPB said would be important for manufactured housing and for minority consumers.

“The GSE Patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” CFPB Director Kathleen L. Kraninger said in a statement. “The Bureau is proposing to replace the Patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them. The Bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE Patch.”

Under the proposal, DTI would still be one of the factors lenders would use when deciding whether to make a loan.

A second CFPB proposal would extend the GSE Patch until a final rule on the proposed replacement goes into effect.

The National Association of Realtors and the American Bankers Association both said they welcomed the CFPB’s action, adding that they would each review the proposal and submit comments. Together, the proposals total almost 300 pages.

The Mortgage Bankers Association also expressed appreciation for the proposals.

“MBA appreciates the CFPB’s proposed changes to the QM Rule and extension of the GSE Patch. As proposed, the regulatory changes would seek to ensure creditworthy borrowers have access to sustainable mortgage credit without disruption to the overall mortgage market,” the MBA said in a statement. “MBA looks forward to reviewing and commenting on both rules, and we will continue to work with policymakers and all other stakeholders to ensure borrowers are both protected and have access to credit throughout the mortgage lending process.”