The Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) contains a requirement that the Consumer
Financial Protection Bureau (CFPB), author of many of the rules under the act, publish
an assessment of its “significant rules and orders” within five years of their
effective date. Among the rules that
CFPB has determined to fit that category are the Ability-to-Repay/Qualified
Mortgage (ATR/QM) Rule and the Real Estate Settlement Procedures Act (RESPA)
Mortgage Servicing Rule. Both came into effect
in January 2014 and assessment of both were published this week.
What follows is a summary of the assessment of the
Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule. A summary of the RESPA Servicing rule will
follow at a later date.
The ATR/QM assessment looks at four broad categories; whether
the rule is effective in assuring the ability to repay, its impact on access to
credit and restricting undesirable loans, creditor cost and the costs of credit,
and effects on market structure. It does
not include any cost-benefit analysis.
It also does not address the necessity of the requirement or alternate
ways Congress might have responded to the housing crisis.
The key requirement of the Rule is that lenders make a
reasonable and good faith determination that the consumer has a reasonable ability
to repay before issuing a mortgage loan and defines certain factors a lender
must consider in making that decision.
Lenders who do not comply can be liable for damages under the Truth-in-Lending-Act
The Rule defines a QM as fully amortizing with a term
no greater than 30 years. Except for small loans, the sum of points and fees
cannot exceed 3 percent of the loan and a borrower’s debt-to-income (DTI) level
is capped at 43 percent. The Rule
creates a Temporary GSE QM which will expire in January 2021 qualifies as QM most
loans eligible for purchase by Fannie Mae or Freddie Mac (the GSEs).
A QM loan is presumed to satisfy the ATR requirement,
providing a “safe harbor” for the lender. A borrower with a “high cost” loan is
given an opportunity to rebut the safe harbor assertion.
Ability to Repay
The assessment says that approximately 50 to 60
percent of mortgages originated between 2005 and 2007 which were foreclosed
within their first two years had features that the ATR/QM rule restricts; i.e. initial
low rates that reset higher or with limited or no documentation. Loans with
these features had largely disappeared before the rule was adopted and today
appear restricted to a few highly credit-worthy borrowers.
High DTIs are historically associated with higher
levels of delinquency. These are now
constrained from returning to crisis-era levels by a combination of the ATR
requirement and GSE underwriting rules.
Currently a DTI limit of 45 percent applies to most loans and only 5 to
8 percent of conventional purchase mortgages exceed that level compared to about
one-quarter of loans originated in 2005-2007.
CFPB looked at a sample of loans that become
delinquent with two years of origination and found the ATR rule was not
generally associated with improvements in performance. This, they say, is due
to historically low delinquency rates on loans originated in the tight credit
environment immediately preceding the rule. The rate for non-QM loans with DTIs
over 43 percent remained steady at 0.6 percent; the rates of GSE loans with
DTIs above 43 percent originated in 2012-2013 was 0.6 percent and increased to
1.0 percent for 2014-2015 originations. “Thus,
although the performance of non-QM loans did not improve in absolute terms, it
has improved relative to the performance of comparable QM loans.”
to Credit and Restrictions on Unaffordable Loans
The implementation of the rule did not create a
significant break in the volume of mortgage application nor in the approval
rate. This is partly attributable to the already-tight credit in effect at the
time and in part to the breadth of the QM definition and the safe harbor it
afforded. CFPB estimates that 97 to 99
percent of loans originated in the year prior to the Rule (2013) would have
satisfied QM requirements.
However, there are market segments where the rule is
more likely to have restricted credit:
Borrowers with high DTIs. CFPB’s analysis indicates the Rule displaced
between 63 and 70 percent of approved purchase applications among non-QM, high
DTI borrowers from 2014 to 2016, a reduction of 1.5 to 2.0 percent of all home
purchase loans made by the nine lenders studied. Other studies back up these findings. The was also reduction in credit access for
refinancing in 2014 followed by gradual improvements in later years.
CFPR also found that
approval rates for high-DTI non-QM borrowers declined across all credit tiers
and income groups with the result that the average credit score and income for
declined borrowers increased after the Rule took effect. Other industry data indicates that delinquency
rates for non-QM high DTI borrowers did not decrease post-rule. Together these
findings suggest loss of credit access was driven by lenders trying to avoid
the risk of litigation by consumers challenging a violation of the ATR requirement
rather than by rejection of borrowers unable to repay the loan.
Self-Employed Borrowers. Self-employed borrowers who do not qualify for
GSE loans (or those with other federal guarantees) generally need to qualify
under the General QM standard. Responses
to a Lender Survey indicate that lenders may find it difficult to comply with
rules related to the documentation and calculation of income and debt. Yet application data indicates that approval
rates for non-high DTI, non-GSE eligible self-employed borrowers have decreased
by only 2 percentage points under the rule.
Small Loan Borrowers. The points-and-fees cap on QM loans could
as these those costs will constitute a higher percentage than for larger
loans. Analysis of Home Mortgage Disclosure
Act (HMDA) data indicates that the Rule has had no effect on credit access for
such loans. Lenders indicate that exceeding
the points and fees cap is sufficient rare that lenders address loans on a
case-by-case basis and they are rarely denied.
Creditor Costs and the Cost of Credit
The Rule has requirements for documentation that may
differ from pre-Rule practices for some lenders and it creates potential
liability for ATR violation. There are
also additional capital requirements under a separate rule administered by
other agencies which may add to funding costs.
At the aggregate market level, the Rule does not
appear to have materially increased costs or prices. The Mortgage Bankers Association’s (MBA’s)
quarterly survey of independent lenders finds origination costs have increased
over the last decade but saw no distinct change at the time the Rule was
implemented. MBA also found that the spread between average 30-year mortgage
rates and the relevant Treasury yield has remained constant post-Rule.
A majority of respondents to CFPB’s Lender Survey indicated
that their business model has changed as a result of the Rule and of those some
pointed to increased documentation or staffing while others said they had
chosen not to originate non-QM loans. The nine lender providing data said their lost
profits amounted to between $20 million and $26 million per year.
Evidence is mixed as to whether the Rule has increased
the price of non-QM loans. None of those nine lenders specifically charge extra
for them. A review of rate sheets from
40 lenders found an adjustment for the loans to be very infrequent. Nevertheless, 23 of 204 lenders responding to
a survey indicated applying an increase and Federal Reserve research finds
loans with high DTIs to be substantially more expensive than those below 43
on Market Structure
The current QM category is broad due to the Temporary
GSE QM rule. The GSEs, contrary to
expectations, have maintained a persistently high share of mortgage lending as
the private-label securities market remains small.
CFPB has looked at whether the Temporary GSE QM
provision has caused an increased reliance on the GSEs’ Automated Underwriting
Systems (AUSs) for loans not sold to the GSEs. They found no immediate increase
in the aggregate volume of submissions to the AUSs relative to the volume of
loans purchased by the GSEs but there does seem a somewhat higher use in recent
years, particularly for loans which do not fit requirements or are more difficult
to document such as those made to self-employed borrowers.
There are allowances within the Rule for small creditors
to originate high-DTI and balloon loans as long as they hold them in portfolio
for two years. Approximately 90 percent
of depository institutions reporting HMDA data in 2016 met the small creditor
definition and accounted for about 24 percent of mortgage loans. The Rule does not appear to be constraining
the activities of these lenders.
There are systemic differences between loans made by
small creditors and non-small creditors.
The former hold a larger share of their loans in portfolio, although
there was a notable decline in that share in 2016, coinciding with an expansion
of the small creditor definition.
Similarly, a larger share of their mortgages is made in rural counties
or to finance manufactured homes.
A survey by the Conference of State Banking
Supervisors in 2015 found that a larger share of small creditor portfolio loans
was non-QM than was true for the larger lender who responded to the
survey. Smaller creditors also reported
declining a smaller percentage of applications.
To the extent small creditors declined applications, they were less
likely that their larger counterparts to attribute their denial to the Rule’s
The assessment also looked at whether adoption of the
Rule has affected mortgage processing time.
After controlling for confounding factors, it found that immediately
after adoption closing times increased by about 3-1/2 days for refinance loans,
but the estimated effect on purchase loan closing times was much smaller, at a
little over one day. The report adds that
it can be presumed these were short-term results.