Banks Making Fewer Mortgages Because of New CFPB Rules, Fed Says
Banks are granting fewer loans because of new mortgage rules recently enacted by the Consumer Financial Protection Bureau, according to a Federal Reserve Board report released Monday.
Only a small fraction of large banks indicated in the survey that the new rule has affected their approval rate for prime conforming mortgages, while a substantial share of the other respondents reported that the rules were lowering their approval rates on such loans," the Fed's senior loan officer opinion survey said.
The survey, which is released by the Fed every three months, asked both large U.S. banks and foreign banks about the effect the new ability-to-pay and qualified mortgage rules were having on approval rates for various types of home purchase loans.
Of the 36 U.S. large banks that responded, seven banks, 19%, said the approval rate on prime residential mortgages was lower than it would have been. The majority of responders, 78%, indicated the approval rate was about the same.
The results were the same whether the borrower had a FICO score equal to or less than 680, or if their credit score was higher than that threshold.
However, if the principal balance was greater than the conforming loan limit, 16 banks, or 44%, said the approval rate was lower than normal, regardless of the borrower’s FICO score. Still, 50% of banks said the approval rate remained about the same.
"Among those banks that reported the rule had no effect on their approval rates, roughly half said that lending policies would have been tighter without the safe harbor for mortgages that pass the GSEs' automated underwriting models," according to the Fed's survey.
Under the CFPB's rules which went into effect in January, loans must meet certain underwriting criteria to be considered qualified mortgages. But the agency created an exception for all loans purchased by Fannie Mae and Freddie Mac, allowing them to automatically qualify for QM status. Banks are generally seeking to make QM loans because they receive greater legal protections.
The Fed survey said that seven banks reported that their approval rates would be lower for nontraditional loans due to the CFPB rules.
Meanwhile, more than half of respondents said that the rules have reduced approval rates on applications for prime jumbo home-purchase loans. Banks cited a 43% cap on debt-to-income ratios as part of the definition of QM and a provision of the ability-to-repay rule that requires mortgage originators to evaluate income and assess credit history, assets and debt payments as a reason for lower approval rates.
More generally, six of the eight large U.S. banks surveyed ranked evaluating and documenting borrower’s credit history, assets and debt as either somewhat important, very important or the most important factor in overall lowering of approval rates. An even greater number of banks said reviewing the borrower’s current and expected income was at least somewhat important.
Separately, all eight large U.S. banks said it was at least somewhat important, if not greater, to ensure that the borrower’s debt to income ratio should not exceed 43%.