By John M. Pachkowski, J.D.
Neil Bhutta, Principal Economist, and Daniel R. Ringo, Economist, at the Federal Reserve Board have used 2014 Home Mortgage Disclosure Act data release to analyze the effects that the Ability-to-Repay and Qualified Mortgage (ATR-QM) regulations have had on mortgage lending.
The Consumer Financial Protection Bureau issued the ATR-QM rules in January 2013 to implement provisions of the Dodd-Frank Act that required lenders to consider certain underwriting criteria and make a good-faith determination that borrowers will have the ability to repay their home loans. Specifically, lenders must consider and verify a number of different underwriting factors, such as a mortgage applicant’s assets or income, debt load, and credit history, and make a reasonable determination that a borrower will be able to pay back the loan.
Lenders are presumed to comply with the ATR requirement when they make a Qualified Mortgage loan, which must meet further underwriting and pricing standards. These requirements generally include a limit on points and fees to 3 percent of the loan amount, along with various restrictions on loan terms and features. QM loans also generally require that the borrower’s total or “back-end” debt-to-income (DTI) ratio does not exceed 43 percent. Lenders also are granted a “safe harbor” on QM loans that are not “higher priced.” Most QM loans achieve safe-harbor status if the spread between the APR of the loan and the average prime offer rate (APOR) does not exceed 150 basis points—1.5 percentage points. For QM loans originated by small creditors, loans up to 350 basis points above APOR that are held in portfolio get safe harbor status.
In their FEDS Notes, Bhutta and Ringo generally found that “some market outcomes were affected by the new rules, but the estimated magnitudes of the responses are small.” They noted that lenders favored loans priced to obtain safe harbor protections.
Although the authors found that the rules did not materially affect the mortgage market in 2014, they cautioned, “This should not be taken, however, as definitive proof that no other changes occurred in response to the rules.” They added the HMDA data lacked information that would be necessary for a more comprehensive review of the mortgage market. For example, they could not directly test if lenders became more reluctant to originate loans above the 43 percent DTI threshold, because all the data necessary to calculate back-end DTI are not reported in HMDA. The HMDA data also lacked information on points and fees, which are limited by rule for QM loans.
Finally, Bhutta and Ringo concluded, “If credit conditions ease in the future and the market regains its appetite for risk, the rules may gain more bite.”
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