Assessments of two Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) rules issued under the 2010 financial reform law focusing on home loan affordability and servicing were announced Thursday by the Consumer Financial Protection Bureau (CFPB).
The assessments – the first such reports issued under the leadership of bureau Director Kathleen (“Kathy”) Kraninger – were issued to satisfy a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The act requires the CFPB to conduct an assessment of each significant rule or order adopted by the bureau and to publish a report of its assessment no later than five years after the effective date of the significant rule or order.
Thursday’s assessment reports focus on the ability-to-repay/qualified mortgage (ATR/QM) rule issued under TILA (Regulation Z) and the mortgage servicing rule issued under RESPA (Regulation X), which went into effect in 2014.
Following are a few of the summarized findings.
ATR/QM rule assessment
- About 50% to 60% of mortgages originated between 2005 and 2007 but which became subject to foreclosure in the first two years after origination had features that the rule generally eliminates, restricts, or otherwise excludes from the definition of a qualified mortgage. This includes, for example, loans with initial low monthly payments that reset later and loans supported with limited or no documentation on the consumer’s home or assets. “Loans with these features had largely disappeared from the market prior to the adoption of the Rule, and today they appear to be restricted to a limited market of highly credit-worthy borrowers,” it says.
- For high debt-to-income (DTI) borrowers, meaning those with a DTI above 43% (one of the original parameters for QM loans), who qualify for a loan eligible for purchase or guarantee by one of the government-sponsored enterprises (GSEs) or a federal housing guarantee agency, the rule has not decreased access to credit since such mortgages meet the standard for QM loans. “In fact, the evidence suggests that the GSEs may have loosened their underwriting requirements for high DTI borrowers, as evidenced by recent trends,” it says.
- Regarding non-QM loans, evidence is mixed as to whether the rule has increased the price of such loans. None of the nine lenders that provided application data in a Lender Survey performed for this assessment charge extra for non-QM loans specifically, and a review of retail rate sheets of approximately 40 lenders revealed that an extra adjustment for non-QM loans is very infrequent. Nevertheless, 23 out of 204 respondents to the survey indicated applying such an increase; recent research by the Federal Reserve Board finds that loans with DTIs above 43% percent are substantially more expensive than similar loans with DTIs at or below 43%.
Mortgage servicing rule assessment
- After controlling for trends in certain observable factors, loans that became delinquent were less likely to proceed to a foreclosure sale during the months after the rule’s effective date compared to months prior to the effective date. The bureau estimates that if the rule had not gone into effect in 2014, at least 26,000 additional borrowers who became delinquent that year would have experienced foreclosure within three years of becoming delinquent. (These estimates assume that the data available to the bureau are representative of the market as a whole; other factors may be in play.)
- Again, after controlling for trends in certain observable factors, loans that became delinquent were more likely to recover from delinquency (that is, to return to current status, including through a modification of the loan terms) following the rule’s effective date, the report says. The bureau estimates that if the rule had not gone into effect in 2014, at least 127,000 fewer borrowers who became delinquent that year would have recovered from delinquency within three years of becoming delinquent. (As with the above finding, other factors may be in play.)
- Data on servicing costs, from a trade association survey focused on large mortgage servicers, suggests that the cost of servicing mortgage loans increased substantially between 2008 and 2013. The estimated average annual cost of servicing performing loans increased from about $60 per loan in 2008 to about $160 per loan in 2013 and remained between $160 and $180 from 2014 to 2017. The estimated average annual cost of servicing loans in default increased from about $480 per loan in 2008 to about $2,410 per loan in 2013 and remained between $2,000 and $2,400 from 2014 to 2017.
The reports, 271 pages and 300 pages long, respectively, include opening messages from Kraninger, who is encouraging input from stakeholders.
“The issuance of this report is not the end of the line for the Bureau,” Kraninger states in her forward to the ATR/QM rule assessment report. “I am committed to assuring that the Bureau uses lessons drawn from the assessments to inform the Bureau’s approach to future rulemakings. We are interested in hearing reactions from stakeholders to the report’s methodology, findings and conclusions. The Bureau anticipates that continued interaction with and receipt of information from stakeholders about this report will help inform the Bureau’s future assessments as well as its future policy decisions regarding this rule.”