Third, as noted earlier, safe harbor protections depend on the pricing of the loan. 2013) and whose prior year total assets were less than $2 billion are considered small creditors. For QM purposes, lending institutions that originated fewer than 500 first-lien, closed-end residential mortgages of a type subject to the ATR requirements in the previous year (i.e. Small creditors, for loans held in portfolio, are not subject to the 43% DTI cap for QM loans and have an elevated price threshold for safe harbor loans. Second, treatment depends on lender size. Lenders are subject to ATR and QM rules for any relevant loan application received on or after January 10, 2014, while applications received beforehand are exempt from the rules. First, treatment depends on the loan application date. In this note we focus on three thresholds written into the ATR and QM rules around which legal treatment of loans changes. Lenders may feel more secure in their legal standing with a safe harbor loan than one granted only a rebuttable presumption. Second, a stronger, conclusive presumption of compliance (known as a "safe harbor") is given to QM loans that are not "higher priced". First, all QM loans are granted a rebuttable presumption of compliance with the ATR rules. Two levels of legal protection against borrowers' allegations of ATR violations are associated with QM loans. Fannie Mae and Freddie Mac), and portfolio loans made by "small creditors." Federal Housing Administration (FHA) and Veterans Administration (VA) loans), loans that are eligible for purchase by the Government Sponsored Enterprises (GSEs, i.e. However, the 43 percent DTI cap does not currently apply to loans with government-backed insurance or guarantees (e.g. 1 QM loans also generally require that the borrower's total or "back-end" debt-to-income (DTI) ratio does not exceed 43 percent. 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). 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. Lenders that are found to violate the ATR rules can be liable for monetary damages. They may also use a violation of the ATR requirement as a defense against foreclosure for the life of 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. 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. The Ability to Repay and Qualified Mortgages Rules Later, we discuss why the rules would not necessarily have had a major effect in 2014, and why they could be more binding in the future. We find evidence that some market outcomes were affected by the new rules, but the estimated magnitudes of the responses are small. This note extends that analysis by conducting sharper tests around the date of enactment, and around lender-size and loan-pricing thresholds, where treatment of loans under the new rules varies. In an article published simultaneously with the 2014 HMDA data release, we examined broad lending patterns and found little indication that the new rules had a significant effect on lending in 2014 (Bhutta, Popper and Ringo (2015)). In this note, we use 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. As the new ATR requirement represents 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. For the first time, Federal law requires lenders to consider certain underwriting criteria and make a good-faith determination that borrowers will have the ability to repay their home loans. On January 10, 2014, the recently formed Consumer Financial Protection Bureau's (CFPB) rules implementing the ATR provision went into effect. One key part of Dodd-Frank - the ability-to-repay (ATR) provision - aims to discourage risky mortgage lending practices that proliferated during the housing boom. history, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Following the recent housing and financial crisis, Congress passed one of the most comprehensive financial reform laws in U.S.
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