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Ability-To-Repay and Qualified Mortgage Rule Assessment Report Message from Kathleen L

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Ability-To-Repay and Qualified Mortgage Rule Assessment Report Message from Kathleen L BUREAU OF CONSUMER FINANCIAL PROTECTION | JANUARY 2019 Ability-to-Repay and Qualified Mortgage Rule Assessment Report Message from Kathleen L. Kraninger Director The Bureau of Consumer Financial Protection is pleased to publish this report containing the results of its assessment of the Ability-to-Repay and Qualified Mortgage Rule that the Bureau issued in 2013 to implement provisions of the Dodd-Frank Act amending the Truth in Lending Act. The provisions were designed to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans. Separately, section 1022(d) of the Dodd-Frank Act requires the Bureau to conduct an assessment of each significant rule or order adopted by the Bureau under Federal consumer financial law. This report has been prepared to satisfy that statutory obligation. This somewhat unique statutory requirement places a responsibility on the Bureau to take a hard look at each significant rule it issues and evaluate whether the rule is effective in achieving its intended objectives, and the purposes and objectives of Title X of the Dodd-Frank Act, or whether it is having unintended consequences. I see this as a valuable opportunity to assure that public policy is being pursued in an efficient and effective manner and to facilitate making evidence-based decisions in the future on whether changes are needed. The Bureau’s Office of Research took the lead in conducting this assessment. The Bureau’s researchers began work over two years ago in identifying the questions that needed to be asked and in exploring the available data sources to answer those questions. The researchers then developed research plans and solicited public comment on such plans and other information. The researchers determined that although public and commercially-available data, along with the National Mortgage Database which the Bureau has developed in collaboration with the Federal Housing Finance Agency, could be used to examine the effects of the rule on the market as a whole, those data were insufficient to examine specific market segments where the rule might have had its largest effect. Accordingly, the Bureau obtained, among other things, a unique dataset comprised of de-identified, loan-level data from a number of creditors to fill this gap. The Bureau’s researchers supplemented those data with a survey to which over 175 lenders 1 BUREAU OF CONSUMER FINANCIAL PROTECTION responded along with data from a survey conducted by the Conference of State Bank Supervisors. Through rigorous statistical analyses of the quantitative data and a careful review of the qualitative data and public comments received in response to the Bureau’s Request For Information, the Bureau has produced this comprehensive assessment report. I am confident that this report provides numerous useful findings and insights for stakeholders, policy makers, and the general public about developments in the origination of mortgages and the effects of the rule on the availability and cost of credit. The issuance of this report is not the end of the line for the Bureau. 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. Sincerely, Kathleen L. Kraninger 2 BUREAU OF CONSUMER FINANCIAL PROTECTION Table of Contents Message from Kathleen L. Kraninger ............................................................................1 Table of Contents ..............................................................................................................3 Executive Summary .........................................................................................................6 1. Introduction ..............................................................................................................15 1.1 Purpose and scope of the assessment ..................................................... 19 1.2 Methodology and plan for assessing effectiveness ................................. 29 1.3 Sources of information and data ............................................................. 32 2. The ATR/QM Rule ....................................................................................................36 2.1 Statutory background .............................................................................. 36 2.2 ATR/QM Rule background ..................................................................... 38 2.3 Overview of ATR/QM Rule requirements .............................................. 42 3. Market overview .......................................................................................................49 3.1 The development of the modern mortgage market ................................ 50 3.2 Early 2000s mortgage market expansion............................................... 56 3.3 Financial crisis and Great Recession: 2007-2009 ................................. 63 3.4 Pre-Rule economic recovery: 2009-2013 ............................................... 67 3.5 Mortgage market pre- and post-Rule...................................................... 69 3.6 Compliance with the Rule ....................................................................... 79 4. Assuring the ability to repay..................................................................................82 3 BUREAU OF CONSUMER FINANCIAL PROTECTION 4.1 Ability to repay and loan performance ................................................... 83 4.2 Loans with restricted features ................................................................. 84 4.3 Historical trends in DTI and relationship with loan performance ........ 96 4.4 Effects of the General QM DTI limit on loan performance.................. 106 5. Effects of the Rule on access to mortgage credit and cost of credit ........................................................................................................................116 5.1 Market trends in origination of loans with DTI greater than 43 percent119 5.2 Evidence from the lender survey........................................................... 123 5.3 Effect of the Rule on access to credit for borrowers with DTI greater than 43 percent: evidence from the Application Data ..........................131 5.4 Effects of the points and fees requirement on the availability of small dollar loans and cost of credit ............................................................... 163 5.5 The rebuttable presumption provision ................................................. 180 6. The Temporary GSE QM .......................................................................................188 6.1 Background ............................................................................................ 189 6.2 Conforming originations since the implementation of the Rule ..........191 6.3 Functional features of the Temporary GSE QM requirements ............ 192 6.4 Meeting the goals of the QM requirements ..........................................204 7. Analysis of the small creditor QM category ......................................................207 7.1 Background ............................................................................................ 208 7.2 Analysis using HMDA data ................................................................... 210 7.3 Evidence from CSBS survey data .......................................................... 223 8. Additional effects of the Rule ..............................................................................229 8.1 Effect on closing times........................................................................... 229 8.2 Survey evidence ..................................................................................... 231 Appendix A: The Rule and Bureau purposes and objectives ...........................235 4 BUREAU OF CONSUMER FINANCIAL PROTECTION Introduction .................................................................................................... 235 Purposes .......................................................................................................... 235 Objectives ........................................................................................................ 238 Appendix B: Comment summaries .......................................................................242 Evidence about ATR/QM Rule effects ........................................................... 243 Recommendations to modify, expand, or eliminate the ATR/QM Rule ...... 254 The assessment plan ....................................................................................... 263 Appendix C: Application data request to nine lenders.................................... 267 5 BUREAU OF CONSUMER FINANCIAL PROTECTION Executive Summary The mortgage market has been a key to homeownership for an increasing number of American families since the middle of the 20th century. T he Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Truth in Lending Act (TILA) in 2010 to place certain new obligations on the origination of consumer mortgages. T he Dodd-Frank Act also directed the Bureau of Consumer Financial Protection
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