Despite months of turmoil and repeated complaints from lenders, Realtors, builders and other members of the housing lobby, the Consumer Finance Protection Bureau’s Qualified Mortgage Rule enacted in 2014 has not had any significant impact on risk taking and credit availability, according to a new study by the Federal Reserve.

Congress passed one of the most comprehensive financial reform laws in U.S. history, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. One key part of Dodd-Frank — the ability-to-repay (ATR) provision — discourages risky mortgage lending practices that proliferated during the housing boom. On January 10, 2014, the Consumer Financial Protection Bureau’s (CFPB) rules implementing the ATR provision went into effect. For the first time, Federal law required lenders to consider certain underwriting criteria and make a good-faith determination that borrowers will have the ability to repay their home loans. As the new ATR requirement represented a shift toward more prescriptive regulation in the residential mortgage market, it is important to understand how the rules are affecting risk taking and credit availability.

Federal Reserve economists Neil Bhutta and Daniel RingoIn used recently released loan level data collected under the Home Mortgage Disclosure Act (HMDA) to examine how the new rules may have affected mortgage lending activity in 2014. They examined broad lending patterns and found little indication that the new rules had a significant effect on lending in 2014. They conducted sharper tests around the date of enactment, and around lender-size and loan-pricing thresholds, where treatment of loans under the new rules varies. They found evidence that some market outcomes were affected by the new rules, but the estimated magnitudes of the responses are small.

The new ATR rules require lenders to consider and verify a number of different underwriting factors, such as a mortgage applicant’s assets or income, debt load, and credit history, and make a reasonable determination that a borrower will be able to pay back the loan. (Thus, these verification requirements prohibit so-called “no-doc” loans, where borrowers’ income and assets are not verified.) Borrowers may allege a violation of the ATR requirement within three years of the date of violation. They may also use a violation of the ATR requirement as a defense against foreclosure for the life of the loan. Lenders that are found to violate the ATR rules can be liable for monetary damages.

Lenders are presumed to comply with the ATR requirement when they make a Qualified Mortgage (QM) loan, which must meet further underwriting and pricing standards. These requirements generally include a limit on points and fees to 3 percent of the loan amount, along with various restrictions on loan terms and features (for example, no negative amortization or interest-only payments and a loan term of 30 years or less).1 QM loans also generally require that the borrower’s total or “back-end” debt-to-income (DTI) ratio does not exceed 43 percent. However, the 43 percent DTI cap does not currently apply to loans with government-backed insurance or guarantees (e.g. Federal Housing Administration (FHA) and Veterans Administration (VA) loans), loans that are eligible for purchase by the Government Sponsored Enterprises (GSEs, i.e. Fannie Mae and Freddie Mac), and portfolio loans made by “small creditors.”

Two levels of legal protection against borrowers’ allegations of ATR violations are associated with QM loans. First, all QM loans are granted a rebuttable presumption of compliance with the ATR rules. Second, a stronger, conclusive presumption of compliance (known as a “safe harbor”) is given to QM loans that are not “higher priced”. Lenders may feel more secure in their legal standing with a safe harbor loan than one granted only a rebuttable presumption.

Lenders responded to the ATR and QM rules, particularly by favoring loans priced to obtain safe harbor protections. However, the estimated magnitudes indicate the rules did not materially affect the mortgage market in 2014.  Though the rule did not necessarily have had a major effect in 2014, it could be more binding in the future for two reasons. First, the QM “patch” which exempts GSE-eligible, FHA and VA loans from the DTI maximum is set to expire in 2021 (or, for the GSEs, when they exit conservatorship if that occurs first). Second, the ATR and QM rules took effect during a period of relatively tight credit, and may restrict practices that lenders were not engaging in regardless (e.g. no-doc lending). If credit conditions ease in the future and the market regains its appetite for risk, the rules may gain more bite.