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Lending

Fed: CFPB rules are driving down mortgage lending

Report says QM, ATR are hurting loan volume

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Mortgage rules imposed by the Consumer Financial Protection Bureau are driving down the number of loans banks are making, the Federal Reserve says.

The CFPB, which is funded through the Federal Reserve, enacted the Qualified Mortgage rule, which went into effect Jan. 10.

Only a small fraction of large banks indicated in the survey that the new rule has affected their approval rate for prime conforming mortgages, while a substantial share of the other respondents reported that the rules were lowering their approval rates on such loans.

This reflects a similar recent report from DBRS, which says that federal regulations, coupled with a general shift from refinance to purchase activities, have resulted in historically low volumes of mortgage loan originations and organic servicing growth, even though home prices have continued to rebound and delinquency and foreclosure rates are at their lowest levels in years.

Further, mortgage credit availability has been expanding, according to the Mortgage Bankers Association.

The quarterly survey polled both large domestic and foreign banks about the effect the ability-to-pay and QM rules have had on approval rates for various types of home purchase loans.

Of the 36 U.S. large banks that responded almost 1 in 5 said the approval rate on prime residential mortgages was lower than it would have been.

The majority of responders, 78%, indicated the approval rate was about the same.

The results were the same whether the borrower had a FICO score equal to or less than 680, or if their credit score was higher than that threshold.

But when the principal balance was greater than the conforming loan limit, 16 banks, or 44%, said the approval rate was lower than normal, regardless of the borrower’s FICO score. Still, 50% of banks said the approval rate remained about the same.

"Among those banks that reported the rule had no effect on their approval rates, roughly half said that lending policies would have been tighter without the safe harbor for mortgages that pass the GSEs' automated underwriting models," the Fed’s survey says.

Under QM, loans must meet certain underwriting criteria to be considered “qualified.”

The agency created an exception for all loans purchased by the GSEs Fannie Mae and Freddie Mac, allowing them to automatically qualify for QM status.

Banks are generally seeking to make QM loans because they receive greater legal protections.

The Fed survey said that seven banks reported that their approval rates would be lower for nontraditional loans due to the CFPB rules.

Meanwhile, more than half of respondents said that the rules have reduced approval rates on applications for prime jumbo home-purchase loans.

Banks cited a 43% cap on debt-to-income ratios as part of the definition of QM and a provision of the ability-to-repay rule that requires mortgage originators to evaluate income and assess credit history, assets and debt payments as a reason for lower approval rates.

More generally, six of the eight large U.S. banks surveyed ranked evaluating and documenting borrower’s credit history, assets and debt as either somewhat important, very important or the most important factor in overall lowering of approval rates.

This tracks with a recent report from the Urban Institute that says using a residual income test like the one used at the Department of Veterans Affairs which looks at the borrower’s ability to pay for food, clothing, transportation, medical expenses and other day-to-day living expenses after paying for all of their home-related expenses.

 

 

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