On January 10, 2019, the BCFP published two reports, mandated by the Dodd-Frank Act, assessing the effectiveness of the Ability-to-Repay and Qualified Mortgage Rule (ATR/QM Rule) and the 2013 RESPA Servicing Rule (Servicing Rule).
Under Section 1022(d) of the Dodd-Frank Act, the BCFP is required to conduct an assessment of each significant rule or order it has adopted and to publish a related report within five years of the rule’s effective date, inviting public comment on recommendations for modifying, expanding, or eliminating the rule or order before such publication. Since the effective date of the ATR/QM Rule and the Servicing Rule occurred in January 2014, the BCFP was required to publish assessments of each rule by January 2019. However, with a combined total of 571 pages of content, the two reports do not provide any recommendations or guidance from the BCFP. Instead, the reports focus on a statistical analysis of each rule.
Both the ATR/QM Rule and the Servicing Rule Assessment Reports included appendices that summarized comments the BCFP received in response to its Requests for Information (RFIs) for each rule. These comments made various recommendations regarding the rules, and while the BCFP indicated that such comments, and the Report findings, will help inform it whether to consider commencing rulemaking in the future regarding the rules, the BCFP did not address any of the comments directly nor did it provide conclusions or recommendations in either Report. Nonetheless, BCFP Director Kathy Kraninger specified in letters at the beginning of each Report that she is committed to assuring that the BCFP uses lessons gathered from the assessments to inform how the BCFP approaches future rulemakings and that she anticipates continued interaction with and receipt of information from stakeholders about the Reports to assist the BCFP in its future policy decisions. Furthermore, for these Section 1022(d) assessments moving forward, the BCFP indicated that it is reconsidering whether to include cost-benefit analysis in its assessments and its published reports, which are not included in these Reports.
ATR/QM Rule Assessment Report
To create the ATR/QM Rule Assessment Report, the BCFP generally addressed ability-to-repay and qualified mortgage (QM) requirements in effect as of January 2014 (except for certain small creditor analyses related to amendments effective in 2016) and analyzed information gathered from a variety of places, including, among other sources, loan origination and performance data from the National Mortgage Database, Black Knight, CoreLogic, and HMDA; Desktop Underwriter and Loan Prospector submissions and acquisitions data provided by Fannie Mae and Freddie Mac; application-level data from nine mortgage lenders (representing large nationally operating banks and non-depositories); a BCFP-conducted lender survey; and supervision data from several fair lending exams. The BCFP used this data to determine the ATR/QM Rule’s effects on consumers’ ability to repay extensions of mortgage credit, access to credit, restriction on unaffordable loans, creditors’ costs and the cost of credit, and market structure. According to the Report, the BCFP found that the ATR/QM Rule largely was effective in meeting its intended goals.
However, importantly, the Report indicated that some findings regarding the ATR/QM Rule’s effectiveness could be attributable, in part, to the financial crisis and the fact that credit had tightened substantially prior to when the Rule took effect. For example, the Report indicated that approximately 50 to 60 percent of mortgages originated between 2005 and 2007 that experienced foreclosure in the first two years after origination were mortgage loans with features that the ATR/QM Rule generally eliminated, restricted, or otherwise excluded, but that loans with these features had largely disappeared from the market prior to the effective date of the Rule. The Report also noted that, while there was not a significant break in the volume of mortgage applications or the average approval rate at the time the ATR/QM Rule became effective, the BCFP estimates that 97 to 99 percent of the loans originated in 2013 (the last year prior to the effective date of the Rule) would have satisfied the QM requirements under the Rule. Overall, however, the BCFP noted that, while a robust market outside the QM space has not emerged, the mortgage market has successfully maintained fairly broad access to credit.
The BCFP referenced a periodic survey (among non-bank lenders) conducted by the MBA which determined that the costs of originating mortgage loans increased over the past decade but that there was not a distinct increase around the time of the ATR/QM Rule’s implementation. The BCFP indicated that it was unable to reasonably obtain evidence that directly measured the extra cost of originating a loan that the Rule may have created, but did conduct its own lender survey to determine material changes in credit policy. A majority of the survey respondents indicated that their business model changed as a result of the ATR/QM Rule, some due to increased income documentation or staffing and others due to a new policy of not originating non-QM loans. Additionally, from the nine lenders that provided application-level data, such lenders’ foregone profits from not originating certain non-QM loans amounted to between $20 and $26 million per year.
In considering the ATR/QM Rule’s effect on the market, the BCFP addressed the temporary category under which loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac (the GSEs) generally qualify as QM loans, finding, for example, that there was not an immediate increase in the aggregate volume of submissions to the GSEs’ Automated Underwriting Systems (AUSs) relative to the volume of loans purchased by GSEs but that the data suggests somewhat higher use of those systems in recent years (particularly for loans which do not fit within or are more difficult to document within the general QM underwriting standards). For loans made under this temporary GSE QM category, in which the more forgiving GSE underwriting standards are utilized rather the general QM standards, this patch is set to expire by January 10, 2021. While the BCFP’s initial belief that the loans granted QM status under the temporary category would decrease has not shown to be the case, the Report did not address how the BCFP will handle the expiration given the persistently high share of the market the GSEs have maintained since the ATR/QM Rule went into effect and the fact that most of the innovation in the mortgage market is occurring under this temporary GSE QM category. Additionally, the BCFP found that the Rule did not appear to constrain the activities of small creditors, even though commenters to the RFI indicated the Rule favored large creditors and reduced competition in the mortgage market.
Additional findings and more detailed analyses can be found in the full Report.
Servicing Rule Assessment Report
To create the Servicing Rule Assessment Report, the BCFP generally addressed the servicing requirements under RESPA/Regulation X in effect as of January 2014 (not the TILA/Regulation Z servicing requirements in effect at the same time, as the BCFP did not deem such provisions to be a “significant” rule) and analyzed information gathered from a variety of places, including, among other sources, monthly loan-level performance data from Black Knight and the GSEs; the American Survey of Mortgage Borrowers (part of the National Mortgage Database program); loan-level data from seven mortgage servicers (chosen from among the largest 100 servicers and representing a range of servicer types); interviews with various mortgage servicers and servicing industry vendors; and mortgage servicing-related consumer complaints submitted to the BCFP. The BCFP used this data to determine trends in the mortgage servicing market relevant to comprehend the Servicing Rule’s effectiveness, changes in the rates of foreclosure and borrowers’ recovery from delinquencies, the Rule’s effect on servicing costs and the servicing market, and effects of particular provisions of the Rule, including provisions regarding early intervention, loss mitigation procedures, foreclosure restrictions, error resolution, and force-placed insurance. The Report seems to provide that the Servicing Rule, in many instances, either was effective in meeting its intended goals or did not have a significant impact on affected entities’ practices, though it acknowledged that there were instances where the Report could not conclusively attribute results directly to the Rule compared to, for example, other factors in the market and that there could be reasons other than the Rule for various observed changes.
The BCFP found that, after the Servicing Rule went into effect, loans that became delinquent were: (1) less likely to proceed to a foreclosure sale; and (2) more likely to recover from delinquency. In particular, based on certain statistical models used, the BCFP claimed that, had the Rule not gone into effect in 2014, roughly 26,000 additional borrowers who became delinquent that year would have experienced foreclosure within three years of becoming delinquent and roughly 127,000 fewer borrowers who became delinquent that year would have recovered from delinquency within three years of becoming delinquent.
In analyzing the overall effects of the Servicing Rule on servicing-related costs, a survey of large mortgage servicers suggested a substantial increase in the cost of servicing mortgage loans in the five years before the Rule’s effective date, which may have been due to legal settlements and investor policies that were similar to requirements later incorporated into the Rule. While this varied among impacted entities, some servicers reported large one-time costs of implementing the Rule as well as significant ongoing costs of complying with the Rule, including the cost for robust control functions and higher personnel costs to support increased communication with delinquent borrowers. However, with regard to certain specific requirements under the Rule, a number of servicers found that such requirements were consistent with their practices prior to the Rule’s promulgation and therefore the servicers did not require substantial operational changes in order to implement such requirements.
The reviewed data indicates that, after the Servicing Rule went into effect, many delinquent borrowers talk to their servicers about loss mitigation options at some point and delinquent borrowers were slightly more likely to apply for loss mitigation earlier in delinquency. Additionally, the BCFP found that the time increased from borrower initiation of a loss mitigation application to completing the application, and from borrower initiation of a loss mitigation application to short-sale offer, after the Rule went into effect, which may be attributable, in some instances, to the extent of documentation required to be collected under the Rule. The Report also suggests that the Rule’s general prohibition on initiating a foreclosure proceeding within the first 120 days of delinquency prevented rather than delayed foreclosures and that the Rule’s foreclosure restrictions have not increased the time it takes for a servicer to go from initiating foreclosure to a sale. The Report noted that data reviewed indicates that a larger share of borrowers completing loss mitigation applications post-Rule were able to avoid foreclosure compared to those doing the same pre-Rule and that, post-Rule, loans had been delinquent for longer when servicers initiated foreclosure, compared to pre-Rule.
In determining the effectiveness of the Servicing Rule’s error resolution requirement, the BCFP found that servicers believed that the Rule had little effect on whether borrowers submitted written error assertions. Furthermore, the data the BCFP reviewed suggested that the rate of written error assertions per account significantly decreased post-Rule overall, though there was variation as to whether such assertions increased or decreased for particular servicers. The BCFP also found evidence that borrowers submitted fewer follow-up or repeat error assertions post-Rule, which may be attributable to servicers becoming more responsive over time.
The BCFP also analyzed the Servicing Rule’s force-placed insurance provisions and found that servicers believe that the Rule’s effects on borrowers and servicers were small since the Rule’s requirements were generally consistent with the force-placed insurance policies and procedures the servicers had in place before the Rule went into effect. The BCFP reported that the data showed a moderate decrease post-Rule in the share of borrowers receiving force-placed insurance, but admitted that this was consistent with requirements imposed the Rule but also possibly something other than the Rule, such as changes in the insurance market that made it easier or less expensive for borrowers to obtain insurance.
Additional findings and more detailed analyses can be found in the full Report.