Mortgage Reforms:

Actions Needed to Help Assess Effects of New Regulations

GAO-15-185: Published: Jun 25, 2015. Publicly Released: Jul 27, 2015.

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What GAO Found

Federal agency officials, market participants, and observers estimated that the qualified mortgage (QM) and qualified residential mortgage (QRM) regulations would have limited initial effects because most loans originated in recent years largely conformed with QM criteria.

The QM regulations, which address lenders' responsibilities to determine a borrower's ability to repay a loan, set forth standards that include prohibitions on risky loan features (such as interest-only or balloon payments) and limits on points and fees. Lenders that originate QM loans receive certain liability protections.

Securities collateralized exclusively by residential mortgages that are “qualified residential mortgages” are exempt from risk-retention requirements. The QRM regulations align the QRM definition with QM; thus, securities collateralized solely by QM loans are not subject to risk-retention requirements.

The analyses GAO reviewed estimated limited effects on the availability of mortgages for most borrowers and that any cost increases (for borrowers, lenders, and investors) would mostly stem from litigation and compliance issues. According to agency officials and observers, the QRM regulations were unlikely to have a significant initial effect on the availability or securitization of mortgages in the current market, largely because the majority of loans originated were expected to be QM loans. However, questions remain about the size and viability of the secondary market for non-QRM-backed securities.

Agencies have begun planning their reviews of the QM and QRM regulations (due January and commencing December 2019, respectively); however, these efforts have not included elements important for conducting effective retrospective reviews. Federal guidance encourages agencies to preplan their retrospective reviews and carefully consider how best to promote empirical testing of the effects of rules. To varying degrees, the relevant agencies have identified outcomes to examine, potential data sources, and analytical methods. But existing data lack important information relevant to the regulations (such as loan performance or borrower debt to income) and planned data enhancements may not be available before agencies start the reviews. The Bureau of Consumer Financial Protection (CFPB) has proposed expanding Home Mortgage Disclosure Act data reporting requirements, but the earliest that the enhanced data will be available is 2017. Similarly, the Department of Housing and Urban Development (HUD) identified how it intends to examine its QM regulations and some potential data sources but has yet to determine how it would measure the effects of these regulations, including metrics, baselines, and analytical methods. Agencies also have not specified how they will conduct their reviews, including determining which data and analytical methods to use. Finalizing plans to retrospectively review the mortgage regulations will position the agencies to better measure the effects of the QM and QRM regulations and identify any unintended consequences. Additionally, the agencies could better understand data limitations and methodological challenges and have sufficient time to develop methods to deal with these limitations and challenges.

Why GAO Did This Study

Amid concerns that risky mortgage products and poor underwriting standards contributed to the recent housing crisis, Congress included mortgage reform provisions (QM and QRM) in the Dodd-Frank Wall Street Reform and Consumer Protection Act. CFPB's regulations establishing standards for QM loans became effective in January 2014. More recently, six agencies jointly issued the final QRM rule that will become effective in December 2015. GAO was asked to review possible effects of these regulations. This report (1) discusses views on the expected effects of the QM and QRM regulations, and (2) examines the extent of agency planning for reviewing the regulations' effects, among its objectives. GAO's methodologies included identifying and reviewing academic, industry, and federal agency analyses on the expected effects of the regulations. GAO also reviewed federal guidance on retrospective reviews and interviewed agency officials to assess agency efforts to examine the effects of the QM and QRM regulations.

What GAO Recommends

CFPB, HUD, and the six agencies responsible for the QRM regulations should complete plans to review the QM and QRM regulations, including identifying specific metrics, baselines, and analytical methods. CFPB, HUD, and one QRM agency—the Federal Deposit Insurance Corporation—concurred or agreed with the recommendations. The other QRM agencies did not explicitly agree with the recommendations, but outlined ongoing efforts to plan their reviews.

For more information, contact Mathew J. Scirè at (202) 512-8678 or sciremj@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In August 2017, CFPB informed GAO that it had developed a plan for assessing its qualified mortgage (QM) regulations. CFPB anticipates using the following specific research activities: (1) quantitative research on loan originations, rejection rates, and loan performance, using available mortgage data and data that CFPB may reasonably collect; (2) analysis of cost of credit before and after the rule, as well as recent trends; (3) interviews with creditors regarding their activities undertaken to comply with the requirements of the ATR/QM Rule; and (4) consultations with government regulatory agencies and government sponsored enterprises. To assess the effectiveness of the ATR/QM Rule in preserving consumer access to responsible and affordable credit, CFPB plans to examine the impact of major provisions of the rule on a set of consumer outcomes, including mortgage cost, origination volumes, approval rates, and subsequent loan performance. In addition to these measureable outcomes, CFPB also plans to consider changes in creditors' underwriting policies and procedures that were made in connection with the rule and which might affect consumer outcomes. CFPB noted that as a general matter, the assessment will associate rule requirements with observed outcomes of interest and consider counterfactual outcomes, to the extent possible. CFPB stated that it plans to draw conclusions as supported by the data, taking into account that factors other than the rule itself may affect observable outcomes.

    Recommendation: To enhance the effectiveness of its preparations for conducting a retrospective review of its QM regulations, CFPB should complete its plan. The plan should identify what outcomes CFPB will examine to measure the effects of the regulations and the specific metrics, baselines, and analytical methods to be used. Furthermore, to account for and help mitigate the limitations of existing data and the uncertain availability of enhanced datasets, CFPB should include in its plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable.

    Agency Affected: Consumer Financial Protection Bureau

  2. Status: Open

    Comments: In February 2017, HUD noted that it does not currently collect data on the annual percentage rate (APR) for each loan that would allow for a perfect comparison to the average prime offer rate. According to HUD, its Office of Housing has on its long-term list of systems priorities to collect specific information from the Uniform Closing Data that could be used to conduct such a comparison. However, HUD stated that it has not received adequate funding to meet these systems enhancements. According to HUD, it is considering the feasibility and potential utility of alternative data sources or the use of a proxy in an appropriate methodology. For instance, whether it may be possible to approximate the APR based upon the note rate and information on closing costs that is collected in the current data system, or alternatively, whether the APR could be obtained or approximated through matching Home Mortgage Disclosure Act data for FHA loans. In a November 21, 2018, email, HUD officials stated that HUD has certain unique considerations for review of its own QM rule as compared to the other federal agencies covered in the GAO report. HUD officials explained that HUD's QM rule implemented certain changes intended to conform with the Consumer Financial Protection Bureau's (CFPB) rule and constituted only a small subset of FHA's overall requirements related to underwriting and loan characteristics. According to HUD officials, HUD's QM rule was intended to make conforming changes to FHA's requirements, as statutorily required, in order to bring them into greater alignment with the new CFPB-promulgated QM rule requirements. They stated that HUD assesses FHA loan performance on an ongoing basis through a variety of mechanisms including the annual audit requirement and monitoring of the overall market and mortgage portfolio. According to the HUD officials, these mechanisms are used to assess the need for adjustments in underwriting criteria and mortgage insurance premiums as well as to assess the health and risks to safety and soundness of the MMIF Fund. The HUD officials said that given these considerations, there is no specific stand-alone full evaluation of the HUD QM rule planned at this time.

    Recommendation: To enhance the effectiveness of its preparations for conducting a retrospective review of its QM regulations, HUD should develop a plan that identifies the metrics, baselines, and analytical methods to be used. Furthermore, to account for and help mitigate the limitations of existing data and the uncertain availability of enhanced datasets, HUD should include in its plan alternate metrics, baselines, and analytical methods that could be used data were to remain unavailable.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: According to information provided by the Federal Housing Finance Agency, it has taken action consistent with GAO's recommendation. Specifically, FHFA stated it planned to use data stored in its Mortgage Loan Integrated System (MLIS, which contains historical information on all Fannie Mae and Freddie Mac loans, including borrower, property, and loan characteristics). FHFA stated that that it will be looking at factors associated with the risk of default, such as loan-to-value ratio (LTV), credit score, and debt-to-income ratio (DTI), which are highly correlated with loan performance. FHFA plans to examine how the default rate (using available proxies such as 90-day delinquency rates) changes for different levels of LTV, credit score, and DTI both individually and in combination. FHFA indicated that it will study the effects by origination year cohorts and different loan products. In addition to MLIS, FHFA noted that it is in joint development with the Bureau of Consumer Financial Protection of the National Mortgage Database. According to FHFA, this database is a 1-in-20 sample of all first lien single-family loans active in the United States since 1998, including Fannie Mae, Freddie Mac, Federal Housing Administration, Department of Veterans Affairs, and private loans. FHFA noted that the database will contain credit bureau, property, demographic, and credit score information for these loans. FHFA stated that it intends to initially do a fuller data analysis to share with the other agencies, and then to further refine its analysis removing and adding elements as necessary and appropriate. FHFA noted that it looked forward to reviewing the analyses from other agencies, and providing complementary research.

    Recommendation: To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable.

    Agency Affected: Federal Housing Finance Agency

  4. Status: Open

    Comments: In February 2017, HUD stated that it has engaged in preliminary discussions both internally and with the other five partner agencies to the 2014 QRM Joint Regulation: OCC, the Federal Reserve Board, FDIC, FHFA and SEC. Based on GAO's recommendations, HUD stated that it has conducted initial reviews of existing and potential methodologies and data sources that may inform the review. HUD also noted that as a fundamental matter, FHA insured mortgages are only securitized through the Government National Mortgage Association (GNMA). Both FHA and GNMA have extensive underlying requirements regarding both mortgage terms and conditions as well as requirements related to the securitization of those mortgages. According to HUD, its retrospective review of the qualified residential mortgage (QRM) rule, in terms of any impact on FHA single family insurance programs, will take into account the existing underlying FHA and GNMA statutes and regulations that already govern those programs. In a November 21, 2018, email, HUD officials stated that the Securities and Exchange Commission is the primary lead agency for the retrospective review of the interagency Credit Risk Retention Rule (aka Qualifying Residential Mortgage or QRM Rule). According to HUD officials, HUD will participate and assist the other 5 federal agencies/entities (SEC, Federal Reserve, FDIC, FHFA and Treasury) in conducting the retrospective review as requested. HUD noted that as with the QM rule, it has a unique role and set of considerations that are distinct from its partner agencies, given the statutory and regulatory framework that applies to FHA's mortgage insurance programs, as well as GNMA.

    Recommendation: To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable.

    Agency Affected: Department of Housing and Urban Development

  5. Status: Open

    Comments: In commenting on the draft report, OCC indicated that it planned to take GAO's recommendation into account as it monitored mortgage market conditions and prepared for upcoming qualified residential mortgage (QRM) reviews. OCC stated that it planned to periodically meet with the other agencies to discuss the implications of any trends it observes and coordinate on studies to better focus and support its evaluation of the review factors. The Department of the Treasury issued a report on June 2017 on depository institutions that could impact the QRM rules and regulations. Specifically, Treasury recommended that CFPB engage in a review of the Ability to Repay/Qualified Mortgage (QM) rule, which the banking regulators' Qualified Residential Mortgage regulations are based on, and work to align QM requirements with GSE eligibility requirements, ultimately phasing out the QM Patch and subjecting all market participants to the same, transparent set of requirements. According to Treasury, these requirements should make ample accommodation for compensating factors that should allow a loan to be a QM loan even if one particular criterion is deemed to fall outside the bounds of the existing framework-for example, a higher DTI loan with compensating factors. However, Treasury noted that QM remains a borrower protection standard, and regulatory agencies should make sure that any changes prioritize consumer protection.

    Recommendation: To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  6. Status: Open

    Comments: In February 2017, FDIC indicated to GAO that it developed a plan that outlines the baseline, data, metrics, and analytical methods that it plans to utilize in the qualified residential mortgage (QRM) definition review. According to FDIC, the plan also outlines FDIC's commitment to working collaboratively with the other agencies. As a baseline, FDIC plans to use the data, metrics, and analytical methods used in the final rulemaking process as outlined in the Supplementary Information to the credit risk retention (CRR) regulation as well as data and analytical methods that the FDIC currently uses to monitor the mortgage and securitization markets and economy on an ongoing basis. According to FDIC, it continues to plan to coordinate with the other agencies on the QRM definition review by allocating responsibilities based on expertise, data, and other resources within each agency as the agencies did in the CRR rulemaking process. The Department of the Treasury issued a report on June 2017 on depository institutions that could impact the QRM rules and regulations. Specifically, Treasury recommended that CFPB engage in a review of the Ability to Repay/Qualified Mortgage (QM) rule, which the banking regulators' Qualified Residential Mortgage regulations are based on, and work to align QM requirements with GSE eligibility requirements, ultimately phasing out the QM Patch and subjecting all market participants to the same, transparent set of requirements. According to Treasury, these requirements should make ample accommodation for compensating factors that should allow a loan to be a QM loan even if one particular criterion is deemed to fall outside the bounds of the existing framework-e.g., a higher DTI loan with compensating factors. However, Treasury noted that QM remains a borrower protection standard, and regulatory agencies should make sure that any changes prioritize consumer protection.

    Recommendation: To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable.

    Agency Affected: Federal Deposit Insurance Corporation

  7. Status: Open

    Comments: In January 2017, the Federal Reserve Board stated that it has an ongoing program to monitor the mortgage and securitization markets as part of the Board's monetary policy, regulatory, and financial stability responsibilities. Federal Reserve Board staff stated that they are continuously researching new data sources, analytical methods, and metrics as part of that program. The Federal Reserve also noted that staff with responsibility for implementing this recommendation continue to meet with their counterparts at other agencies. The Department of the Treasury issued a report on June 2017 on depository institutions that could impact the QRM rules and regulations. Specifically, Treasury recommended that CFPB engage in a review of the Ability to Repay/Qualified Mortgage (QM) rule, which the banking regulators' Qualified Residential Mortgage regulations are based on, and work to align QM requirements with GSE eligibility requirements, ultimately phasing out the QM Patch and subjecting all market participants to the same, transparent set of requirements. According to Treasury, these requirements should make ample accommodation for compensating factors that should allow a loan to be a QM loan even if one particular criterion is deemed to fall outside the bounds of the existing framework-e.g., a higher DTI loan with compensating factors. However, Treasury noted that QM remains a borrower protection standard, and regulatory agencies should make sure that any changes prioritize consumer protection.

    Recommendation: To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable.

    Agency Affected: Federal Reserve System: Board of Governors

  8. Status: Closed - Implemented

    Comments: SEC has taken action consistent with GAO's recommendation. Specifically, SEC staff have undertaken the development of a plan for the review of the definition of Qualified Residential Mortgage (QRM) set forth in the credit risk retention rule (17 CFR Part 246), which is required to commence no later than December 24, 2019. According to SEC, the plan identifies the metrics, baselines, and analytical methods to be used (including alternate metrics, baselines, and analytical methods that could help mitigate limitations of existing data) and specifies the SEC's role and responsibility in the review process. SEC noted that the key role of SEC staff in the QRM review process will be to provide data analysis, through its Division of Economic and Risk Analysis, to enable the agencies responsible for the QRM regulations to make an informed decision regarding whether changes should be made to the QRM definition. Such data analysis also would form the basis of the SEC's economic analysis regarding any changes to the QRM definition, which is required for any proposed or final rulemaking involving the SEC. SEC noted that although the review plan describes several proposed analytical approaches, the precise analytical approach to review the mortgage market conditions and the definition of QRM will depend on future data availability, future mortgage market conditions, and the role of Fannie Mae and Freddie Mac and other participants in those markets at that time.

    Recommendation: To enhance the effectiveness of their preparations for conducting a retrospective review of the QRM regulations, the agencies responsible for the QRM regulations--Federal Deposit Insurance Corporation, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, HUD, Office of the Comptroller of the Currency, and Securities and Exchange Commission--should develop a plan that identifies the metrics, baselines, and analytical methods to be used and specify the roles and responsibilities of each agency in the review process. Furthermore, to account for and help mitigate limitations of existing data and the uncertain availability of enhanced datasets, the six agencies should include in their plan alternate metrics, baselines, and analytical methods that could be used if data were to remain unavailable.

    Agency Affected: United States Securities and Exchange Commission

 

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