Large Banks Report Lower QM Effects than Other Banks
The Federal Reserve's July Senior Loan Officer Opinion Survey on Bank Lending Practices showed a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand. Although many banks reported having eased standards for prime residential real estate loans, respondents generally indicated little change in standards and terms for other types of loans to households.
Seventy-one banks, almost evenly divided between large banks and "other" banks, responded to most questions about prime residential lending While 20 percent said their lending in that category had remained essentially unchanged over the past three months, 24 percent (mostly large banks) said they had eased their requirements somewhat. One large bank and three other banks (5.6 percent of the total) noted some degree of tightening for these loans.
Only 36 banks reported underwriting nontraditional residential loans and 78 percent of those reported little change in their standards while 14 percent reported some easing and 8.3 percent some tightening. Only four banks reported doing any subprime lending.
Demand for purchase prime mortgages was reported to be about the same as three months earlier by 41 percent of respondents and moderately stronger by 50 percent. Among those banks responding about non-traditional mortgages 80 percent reported demand largely unchanged and 17.1 percent noted a moderate growth.
Among the 71 banks answering questions regarding home equity lines of credit 87 percent said their underwriting criteria was basically unchanged from the April survey. Demand for these loans was reported as moderately stronger by 31 percent and unchanged by 60 percent.
The July survey included a set of special questions on the effects on the approval rates for home-purchase loans of the Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (the ATR/QM rule), which came into effect early this year. The majority of banks (62.9 percent) reported that the new rule has had no effect on the approval rate of prime conforming mortgages, in part because those loans qualify for a safe harbor under the exemption for loans that meet the underwriting criteria of the government-sponsored housing enterprises (GSEs). Most of the remaining respondents said that the approval rate is somewhat lower than it would otherwise be.
"Other" banks, however were much more likely to report an effect from the new rules than larger banks. While 78 percent of large banks reported little change in loan approvals, only 47 percent of others said this and another 47 percent reported a lower rate of approval. In addition, among the banks reporting that the rules had no effect on their approval rates, about half indicated that lending policies would have been tighter without the safe harbor for mortgages that pass the GSEs' automated underwriting models
In contrast, about half of the respondents indicated that the ATR/QM rule has reduced approval rates on applications for prime jumbo home-purchase loans and nontraditional mortgages. Again the responses reporting negative consequences from the rules were skewed toward "other" banks.
Among the institutions indicating lower approval rates for such loans, most reported that each of the following provisions were important reasons for the lower approval rates: the ATR provisions that require mortgage originators to evaluate income and to assess credit history, assets, and debt payments; and the QM provision that caps the borrower's back-end debt-to-income ratio at 43 percent. Finally, more than half of the 36 respondents that originate nontraditional mortgages also indicated lower approval rates on nontraditional home-purchase loans due to the ATR/QM rule.
Another set of special questions in the July survey asked respondents to describe current levels of lending standards relative to the midpoint of the range over which their bank's standards had varied between 2005 and the present. With respect to the six types of residential real estate loans included in the survey (prime conforming mortgages, mortgages guaranteed by the Federal Housing Administration or the U.S. Department of Veterans Affairs, prime jumbo mortgages, subprime mortgages, nontraditional mortgages, and HELOCs) standards were reported to be at least somewhat tighter than the midpoints of the ranges that those standards have occupied since 2005. However, these results still indicate a net easing of credit conditions for the loans from the even tighter levels reported in the July 2013 survey.