The Federal Housing Finance Agency (FHFA) has decided to delay the implementation of the upfront fee on Fannie Mae and Freddie Mac borrowers with higher debt-to-income (DTI) ratios. This move has given a breather to mortgage lenders who were lobbying for an alternative that would eliminate the DTI-based loan level pricing adjustments. The Community Home Lenders Association (CHLA) has taken a similar position and called for the FHFA to consider a full repeal of the DTI fee.
During the mortgage application and underwriting process, a borrower’s debt-to-income (DTI) ratio can fluctuate, and the FHFA’s latest fees will ultimately result in changes in the borrower’s expenses between the application and closing. This will necessitate the need for multiple redisclosures, which will raise compliance costs and potentially confuse borrowers. This issue is particularly challenging for self-employed borrowers who may encounter a shift in their DTI ratio between the application and closing.
The delay in implementing the DTI-based fee is to ensure that all lenders have sufficient time to deploy the fee, according to the FHFA. In addition, the delay provides lenders with additional time to address the operational and compliance issues associated with implementing a DTI-based loan level pricing adjustment (LLPA). Nevertheless, lenders remain apprehensive that the fee will be unsustainable once it takes effect, regardless of whether it is scheduled for May, August, or 2024.
Due to dwindling profits, or in some cases, the lack thereof, and with volume plummeting to half of what it was a year ago, lenders cannot withstand the economic impact of bearing pricing hits, primarily because they are unable to fully transfer the loan level pricing adjustment (LLPA) to borrowers. This is largely attributed to concerns over potential violations of the Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosures (TRID) regulations. Consequently, the deferment of the fee’s implementation offers the industry an extended period to persuade the FHFA to reconsider its stance on this policy.