New lending rules (ATR/QM rule) that went into effect on Friday, January 10th, 2014 requires that originators make a good faith effort to verify a borrower’s ability to repay their mortgage and imposes stiff penalties if they do not. These rules make sense to protect the consumer, but can also give lenders pause.
In April of 2014, NAR Research conducted its second survey of mortgage originators. The study found that some lenders have opted for buffers ahead of the QM parameters. The use of buffers was most common on the 3% cap with 28.6% of respondents employing one. 20% of respondents had a buffer ahead of the 43% maximum back-end DTI ratio and 18% for the boundary between safe harbor and rebuttable presumption QM.
When asked their rationale(s) for using a buffer, 44.4% indicated concern over buy-back risk followed by “concern over ability to discover all aspects of the borrower’s ability to repay” at 38.9%. “No portfolio” was not an issue for this sample and only 16.7% of the sample indicated litigation costs as a driver.
Finally, nearly a third of respondents had not adapted to the QM rule by April of 2014. Once adapted, 22.2% intend to maintain their buffers, while only 5.6% will eliminate them. This pattern suggests that lender concerns could hamper a full expansion of the credit box even as lenders become more comfortable with the QM rule and its risks.