On January 10, 2019, the CFPB issued a press release regarding two recently-released reports, which analyze the efficacy of the Ability to Repay Rule (ATR), and the RESPA Servicing Rule (Servicing Rule). The assessment reports analyze data collected since the rules were enacted in January 2013, and are designed to assess whether they have met their intended purpose and to determine their effect on the industry.
The ATR requires residential mortgage lenders to make a determination, before extending credit, that borrowers have the ability to repay a mortgage loan. If a mortgage loan meets certain factors—generally, if it was underwritten with the hallmarks of a sound mortgage loan—then it is considered to be a “Qualified Mortgage,” and is presumed to meet the ATR standard. At a high level, the ATR assessment report found that the ATR, in combination with the tight post-financial crisis credit market, succeeded in ensuring that mortgage loans have been of higher quality and less likely to result in default. For example, the report observes that far fewer loans are originated with limited (or no) documentation supporting the prospective borrower’s income, and that loans are less likely to include features that may result in default (such as “payshock,” i.e. when payments are initially low, but rise dramatically after a certain period of time). The report also found that, for most borrowers, the ATR has not caused a restriction on their access to credit. Notwithstanding that finding, the report did conclude that access to credit for certain segments of the market did decrease. For example, the report finds that borrowers with high debt-to-income ratios, who are self-employed, and who seek smaller loan amounts had decreased access to credit since the ATR became effective. Finally, the report concludes that, at a high level, the ATR did not materially increase the cost of credit to consumers.
The Servicing Rule placed new requirements on mortgage loan servicers, with a particular emphasis on the foreclosure avoidance process. The Servicing Rule assessment report concludes that there was a marked decrease in foreclosures after the rule was enacted in 2014. Without the Servicing Rule, the CFPB estimates that as many as 26,000 additional borrowers would have faced foreclosure within three years of becoming delinquent, and at least 127,000 fewer borrowers would have recovered from their delinquency within the same time period. The Servicing Rule assessment report concludes that, although the cost of servicing loans quadrupled since 2008, the increase was not entirely due to the Servicing Rule. During the same time period, many servicers agreed to separate settlements with regulators—which required many of the same changes to servicing practices as the Servicing Rule does—contributing to the increase in servicing costs.
In recounting interviews with servicers, the report reflects that servicers identified compliance costs—both on a one-time basis as servicers undertook to comply with the rule, and on an ongoing basis—as the primary driver of the increase in servicing costs to them. In particular, servicers identified the biggest cost drivers as the requirements to (1) provide a five-day acknowledgment notice confirming receipt of loss mitigation applications, (2) evaluate borrowers for all available loss mitigation options simultaneously, and (3) provide decision letters describing the outcome of each loss mitigation review. Overall, the assessment report finds that the Servicing Rule has enabled more borrowers to avoid foreclosure, and that loss mitigation errors have halved since the Servicing Rule’s effective date.
In its press release, the CFPB emphasized that it will continue to analyze the ATR’s and the Servicing Rule’s effectiveness on an ongoing basis, and emphasized the CFPB’s desire for a continued dialogue with consumers and the regulated community. On the whole, the assessment reports appear to conclude that both the ATR and the Servicing Rule are accomplishing their intended purposes, without undue cost to the regulated community or decrease in access to credit to borrowers. LenderLaw Watch will continue to monitor the ATR and the Servicing Rule, and will provide any relevant updates.