New Lender Survey Suggests QM Will Impact Credit Standards and Operational Costs

The Ability-to-Repay (ATR) and Qualified Mortgage (QM) rule issued by the Consumer Finance Protection Bureau, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), took effect on January 10, 2014. This new rule generally requires lenders to consider and verify factors indicative of a consumer’s ability to repay the loan before originating the mortgage. Mortgage loans with limited points and fees and restrictive loan features such as no negative amortization are considered Qualified Mortgages, which may be presumed to comply with this new rule.¹ 

In a similar vein, because of increased regulatory requirements, many lenders might have strengthened their quality control (QC) reviews. This is done to enhance the quality of mortgages, reduce repurchase risk, and prevent fraud.

Given the large amount of discussion in the mortgage industry about these topics, Fannie Mae’s Economic and Strategic Research Group surveyed senior mortgage executives in June 2014 via its quarterly Mortgage Lender Sentiment Survey² to better understand how lenders are adapting to the new ATR/QM standards and the increase in QC investments.

The survey results show that most lenders indicated that QM rules have had little impact on their business strategies, but most expect their operational costs to increase as a result of QM. Most lenders also reported that their costs for QC-related activities have increased over the past 12 months. Additionally, an anticipated net tightening of credit standards as a result of QM rules was observed from the study. Survey findings include:

• 80 percent of the lenders surveyed say they “do not plan to pursue non-QM loans” or prefer to “wait and see (business as usual).” In addition, larger lenders are more likely than smaller and medium-sized lenders to report that they “plan to actively pursue non-QM loans.”
• 84 percent of the lenders surveyed reported that they expect at least 90 percent of their single-family mortgage origination dollar volume to be considered qualified mortgages under the new QM rules.
• 74 percent of the lenders surveyed reported that they expect their operational costs to increase as a result of QM rules.
• 36 percent of the lenders surveyed reported that they expect to tighten their credit standards as a result of QM rules, whereas only 6 percent of the lenders surveyed reported that they expect to ease their underwriting criteria.
• 85 percent of the lenders surveyed say their costs for QC-related activities increased over the last 12 months.
• 74 percent of all lenders surveyed agree that “the quality control investments will reduce their repurchase risk.” Smaller lenders, however, are less likely to agree that “the quality control investments will reduce their repurchase risk.”

To learn more about this analysis, read our Fannie Mae Mortgage Lender Sentiment Survey Topic Analysis.

¹For details of the ATR/QM rule, see the Consumer Finance Protection Bureau web site,https://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/#rule

²For details about this industry survey, such as methodology, questionnaires, research report, please see the Mortgage Lender Sentiment Survey web page on fanniemae.com, https://www.fanniemae.com/portal/research-insights/surveys/mortgage-lender-sentiment-survey.html

Li-Ning Huang, Ph.D.
Senior Manager, Business Strategy
Economic & Strategic Research

August 14, 2014

The author thanks Doug Duncan, Renee Schultz, Tom Seidenstein, Gerry Flood, Steve Deggendorf, Richard Koss, Steve Solomon, and David Keil for valuable comments in the creation of this commentary and the design of the special-topic questions. Of course, all errors and omissions remain the responsibility of the author.

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