As a mortgage banker, would you be surprised to learn that the Consumer Financial Protection Bureau's (CFPB) new mortgage rules are reducing approval rates?
In a survey of loan officers commissioned by the Federal Reserve Board in July, more than half said the CFPB's ability-to-repay/qualified mortgage (ATR/QM) rule has reduced approval rates on applications for prime conforming mortgages, as well as prime jumbo and nontraditional mortgages.
Roughly 44% of lenders said ATR/QM had not affected their approval rates, however this fluctuates depending on the type of loan.
Among the lenders that said ATR/QM had not affected approval rates, about half said their lending policies would have been tighter anyway, even if the new ATR/QM rules had not been implemented. This is primarily due to the adjustments made to the government-sponsored enterprises' (GSEs) automated underwriting models in 2008, in response to the housing crisis.
Among the lenders that said ATR/QM had affected approval rates, most reported that the ATR provisions that require originators to evaluate income, credit history, assets and debt payments were the primary reason for the decline in approvals. The QM provision that caps the borrower's back-end debt-to-income ratio at 43% is also a primary cause of the decline in approvals, these lenders said.
More than half of the 36 respondents that originate nontraditional mortgages said they had seen a decline in approval rates for these products due to the ATR/QM rule.
The survey includes a series of questions about how ATR/QM is affecting approval rates based on a range of criteria, such as loan type and borrower eligibility standards, including FICO.
For example, the survey asked lenders how much ATR/QM had impacted approval rates for prime residential mortgages with principal balances less than or equal to the conforming loan limits announced by the Federal Housing Finance Agency and associated with a borrower who has a FICO score (or equivalent) of less than or equal to 680. About 32% said the approval rate for these loans was ‘somewhat lower than it would otherwise be,’ due to ATR/QM, while a surprising 63% say ‘the approval rate is about the same.’
However, when asked how much ATR/QM had affected approvals for loans categorized as prime residential mortgages with principal balances greater than the conforming loan limits announced by the FHFA, about 47.8% said the approval rate was ‘somewhat lower than it would otherwise be,’ and about another 4.5% said it was ‘much lower than it would otherwise be.’
When asked how much ATR/QM had affected approval rates for loans categorized as ‘nontraditional mortgages,’ about 47.2% said the approval rate was ‘somewhat lower than it would otherwise be,’ and about another 5.6% said it was ‘much lower than it would otherwise be.’
Interestingly, smaller banks (those called ‘other’ in the survey) were much more likely to report lower approval rates due to ATR/QM compared to the ‘large’ banks. While 78% of ‘large’ banks said the new rules had resulted in no change in loan approvals, only about 44% of ‘other’ banks said the same.
Meanwhile, the survey shows that some lenders have eased their lending standards in recent months, as demand for loans has increased.
‘A moderate net fraction of domestic banks reported having eased their standards on prime residential mortgages, on net, while most indicated that standards on nontraditional mortgages and home equity lines of credit (HELOCs) were relatively little changed,’ the report states. ‘Banks reported having experienced stronger demand, on balance, for prime residential mortgages for the first time since a year ago, and for HELOCs for the first time since the October 2013 survey.’
The survey is based on responses from senior loan officers working at 75 U.S. banks.
To read the full report, click here.
