The ability-to-repay standard is responsible for the reduction in loan application defects over the past four-plus years, according to First American Financial Corp.

For April, the First American Loan Application Defect Index was 82, unchanged from March, but up from 81 in April 2017. However, the index is down 19.6% from October 2013, when it was at 102, before the ATR rules went into effect in January 2014. The index measures the frequency of defects, fraud and misrepresentations in mortgage applications.

The Consumer Financial Protection Bureau is considering changes to the ATR and qualified mortgage rules that would loosen those standards.

"Since the ability-to-repay rules were issued, there has been a precipitous and significant decline in income-specific mortgage loan application misrepresentation, defect and fraud risk. In fact, our income-specific metric within the Loan Application Defect Index reached its peak in December 2012, one month before the rules were issued." said First American's Chief Economist Mark Fleming in a press release.

Loan application defects

"By September 2013, nine months later, the income-specific defect risk metric declined 33%, as lenders implemented new loan manufacturing and underwriting practices in preparation for the effective start of the rule in January 2014. Since then, income-specific defect and fraud risk has continued to decline and is currently 70% below its peak prior to publication of the ability-to-repay rules."

For April, the income risk index was at 39, up from 38 in March, its all-time low. In December 2012, this component was at 131. In October 2013, when the overall index was at its all-time high, the income risk index was 88.

"The rules have reduced the incentive to fraudulently misrepresent one's income, a benefit to lenders," said Fleming. "The ability-to-repay standards are essentially the mortgage fraud risk prevention equivalent of using a steering wheel lock to dissuade potential car thieves."

The refinance component of the index was at 71 for April, up from 70 in March and 66 in April 2017. Meanwhile for purchases, April's index was 87, compared with 89 in March and 89 in April 2017.

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