Memo to CFPB: Evaluating Alternative Approaches

In the CFPB’s recent Advance Notice of Proposed Rulemaking, the Bureau posed many questions, including:

  • Should the Bureau grant QM status to loans with DTI ratios above a prescribed limit if certain compensating factors are present?
  • Should the Bureau replace or supplement the DTI limit with another method (e.g., residual income or another method)?

In these and all other cases the Bureau requested that commenters provide data and analysis to support their views about alternative approaches.

To properly evaluate any alternative approaches such as monetary reserves or residual income, the data series must meet to two keys tests:

  • It must be long enough to encompass a complete boom-bust cycle, which means it must extend back to the late 1990s.
  • It must represent a comprehensive and representative share of mortgage originations.

In 2011 the Bureau presented such a comprehensive dataset for debt-to-income ratios (2007 updated to include loan default experience after 2011):

With respect to the utility of monetary reserves as an alternative approach, I know of only one source for data that meet the two-part test noted above—Fannie Mae and Freddie Mac.  The CFPB should immediately approach the Federal Housing Finance Agency to request access to these data.  This is the same process the Bureau used in 2011 to obtain DTI data.

With respect to the utility of residual income as an alternative approach, I know of only one source for data that meet the two-part test noted above—the Veterans Administration.  The CFPB should immediately approach the VA to request access to these data.



Edward J. Pinto

By Edward J Pinto

American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s Center on Housing Markets and Finance.  Along with AEI resident scholar Stephen Oliner, Pinto is creator of the Wealth Building Home Mortgage, a new approach to home finance designed to serve the twin goals of providing to a broad range of homebuyers – including low-income, minority, and first-time buyers – with a more reliable and effective means of building wealth than currently available under existing policies, while maintaining buying power similar to a 30-year loan.  He is currently researching approaches to increase the supply of market rate economical apartments for hourly wage earners. Active in housing finance for 45 years, he was an executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done ground breaking research on the role of federal housing policy in the 2008 mortgage and financial crisis.  He is now conducting research on the current house price boom that began in 2012. Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign. He can be reached at