One Third of Banks Approve Fewer Prime Mortgages Due to QM Rule

The new QM rule that went into effect six months ago is having a much greater impact on borrowers than many predicted.  Banks are granting fewer loans because of the new rule that regulates ability to repay requirements even for loans to borrowers with FICO scores higher than 680, according new Federal Reserve survey.

While few banks changed their standards because of the new rule, many said they are approving fewer mortgage applications, especially smaller banks. Under the Consumer Finance Protection Board’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.

“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,” according to the Fed’s July 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices.

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.

More than a third of banks (35.8 percent) including half of all smaller banks (50.1 percent) reported the rule has lowered their approval rate for prime residential mortgages for borrowers with FICO scores lower than 680.

However, for borrowers with FICO scores of 680, and above, nearly as many banks, some 31.4 percent, said they are approving “somewhat” fewer mortgages, including 44.1 percent of smaller banks.  No bank said that its approval rate is much lower than it would otherwise be for borrowers with higher scores.

Among applications for jumbo loans (whose balances exceed conforming loan limits), 52.5 percent banks participating in the survey reported that the rule has lower approval rates because of the QM rule, including 58.1 percent of smaller banks.

For borrowers with FICOs under 680, the provisions of the rule having the greatest impact on lowering banks’ lending policies are evaluation of current and expected income (84 percent)and the borrower’s debt to income ratio should not exceed 43 percent (84 percent).  For those with FICOs over 680, evaluation of income ranked first (91.3 percent), followed by evaluate and document the borrower’s credit history, assets, and debt payments (78.2 percent.)  For jumbo borrowers, evaluation of borrower’s current and expected income also ranked first at 92.7 percent followed by evaluate and document the borrower’s credit history, assets, and debt (78.2 percent).

Despite the lower approval rates due to the QM rule banks reported business is booming.  Demand for mortgages has increased 37 percent over the past three months, and demand for home equity lines of credit has increased 33.8 percent among banks, especially larger banks.