CFPB Rules Harming Mortgage Lending, According to Federal Reserve

New mortgage rules imposed by the Consumer Financial Protection Bureau (CFPB) are driving down mortgages made by banks, according to a new report by the Federal Reserve.

The CFPB is funded through the Federal Reserve. Its new Qualified Mortgage rule, among others, went into effect on January 10.

According to a survey, a small percentage of large banks said the rule has affected their approval rate for prime conforming loans, which are made to well qualified buyers for amounts under $417,000, although a large share of other respondents said the rules were lowering approval rates on the same types of mortgages.

This is similar to a report from DBRS. In its U.S. Residential Mortgage Servicing Midyear Review and 2014 Outlook, the agency noted that new federal regulations along with a shift from refinancing to purchase loans, has resulted in historically low volumes of mortgage originations, despite rebounding home prices.

The survey polled large domestic and foreign lenders about the effect of the ability-to-pay and Qualified Mortgage rules on approval rates for several types of mortgages. Of the 36 large banks that responded, about 20% said the approval rate on prime mortgages was lower. 78% of respondents indicated an approval rate that has not changed.

These results were the same, whether borrowers had a FICO score of 680 or lower or if their credit score was higher than 680 (prime borrowers).

When the principal balances exceeded the conforming loan limit, 44% of banks said the approval rate was lower, regardless of credit score, while 50% said the approval rate was the same.

Under the Qualified Mortgage rule, loans must meet strict underwriting criteria. An exemption was made for loans purchased by Fannie Mae and Freddie Mae, allowing them to automatically qualify for QM status. Banks typically attempt to make QM loans to receive greater legal protection under the law.

Banks cited the 43% cap on debt-to-income ratios as part of the ability-to-repay rule and QM rule, which requires lenders to evaluate borrowers’ income, credit history, debt payments and assets, as the leading reason for lower approval rates on loans.

Mortgage credit availability has been expanding slightly, according to the Mortgage Bakers Association, which is helping more consumers access financing.