Single-Family Mortgage Pricing and Primary Market Policy Issues
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Single-Family Mortgage Pricing and Primary
December 2, 2021
Market Policy Issues
Darryl E. Getter
Market Policy Issues
Updated December 11, 2025
(R46980)
Jump to Main Text of Report
Specialist in Financial
ASpecifically, a single-family mortgage is a loan secured by a residential property dwelling having at least one single-family mortgage is a loan secured by a residential property dwelling having at least one
Economics
and no more than four separate units. A single-family mortgage borrower is typically the and no more than four separate units. A single-family mortgage borrower is typically the
homeowner using the loan to purchase the residence. Over the life of the loan, the borrower homeowner using the loan to purchase the residence. Over the life of the loan, the borrower
typically makes installment payments to repay the loantypically makes installment payments to repay the loan’'s outstanding principal balance and s outstanding principal balance and
interest costs.interest costs.
A
The mortgage price consists of two components—the monthly coupon mortgage price consists of two components—the monthly coupon (i.e., interest rate) and the upfront costs. For and the upfront costs. For athe conventional 30-year fixed rate mortgage, 30-year fixed rate mortgage,
for example, the monthly coupon component the monthly coupon component may begin with a typically begins with a baseline U.S. Treasury interest rate followed by adjustments for U.S. Treasury interest rate followed by adjustments for
additional financial risksadditional financial risks. For prepayment risk, which is the risk that a borrower repays the loan early, and fees. The monthly ongoing (i.e., paid over the life of the loan) coupon begins with a baseline interest rate—a rate equivalent to that of the 10-year Treasury the 10-year Treasury
bondbond, which has a maturity that better aligns with the lifespan of a has a maturity that better aligns with the lifespan of a traditional 30-year fixed rate mortgage and, therefore, can be used
as the designated minimum base interest rate to begin pricing these loans. Next, the minimum base interest rate is adjusted for
a borrower’s default risk—the risk that the borrower is delinquent or fails to repay the loan. The loan servicing fees are also
included in the monthly coupon. For the upfront cost component of the mortgage price, it 30-year mortgage. The borrower's prepayment risk—the risk that the loan is paid ahead of schedule—and default risk—the risk that loan payments are late or not repaid at all—are subsequently added to the baseline interest rate. Next, loan servicing fees are added to the monthly coupon. The upfront mortgage component consists of various fees—some that consists of various fees—some that
are related to the housing purchase transaction and some linked to obtaining the mortgage that were not incorporated into the are related to the housing purchase transaction and some linked to obtaining the mortgage that were not incorporated into the
interest rate. interest rate. These charges may include loan origination fees (e.g.,These costs include and are not limited to loan origination fees, which may include the costs to purchase credit costs to purchase credit
reporting data and verify borrowersreporting data and verify borrowers’' identities, incomes, and employment identities, incomes, and employment;), appraisal fees appraisal fees;, and settlement service fees and settlement service fees such as
(e.g., title insurancetitle insurance and, recording fees recording fees). The total mortgage price. The price or total costs of a mortgage, referred to as the annual percentage rate (APR), is , referred to as the annual percentage rate (APR), is
the sum of the the sum of theinterest ratemonthly coupon and various upfront costs and is usually expressed as a percentage. For any given APR, a and various upfront costs and is usually expressed as a percentage. For any given APR, a trade-off
exists that allows a borrowerborrower can choose whether to pay either higher upfront costs to lower the to pay either higher upfront costs to lower the mortgage interestcoupon rate or lower upfront fees rate or lower upfront fees forand a a
higher higherinterestcoupon rate. rate.
One reason for congressional
Congressional interest in mortgage pricing stems from concerns about consumers obtaining high-cost interest in mortgage pricing stems from concerns about consumers obtaining high-cost
residential mortgages. residential mortgages.CertainSome borrowers with impaired or borrowers with impaired or non-existentnonexistent credit histories pose greater default credit histories pose greater default riskrisks to lenders to lenders
and, consequently, and, consequently,would be expected by pay higher borrowing costs relative to creditworthy borrowers. pay higher borrowing costs relative to creditworthy borrowers. Another possibility
is that borrowers may obtain high-cost mortgages due to predatory or discriminatory pricing practices. Additionally, the
absence of sufficient disclosures would also result in many borrowers paying excessive rates and fees. First-time
homebuyers, for example, are less likely to be familiar with the various charges and fees associated with obtaining a
mortgage, and they may not understand that a trade-off exists between interest rates and upfront costs. As a result, these
borrowers are unlikely to be effective shoppers and possibly obtain better pricing.
Borrowers, particularly first-time homebuyers, may lack sufficient understanding of key mortgage pricing disclosures. They may have little or no familiarity with the various charges and fees associated with obtaining a mortgage. They may be unaware of the option to pay either a higher monthly coupon payment or higher costs upfront to reduce their monthly payment. Consequently, these borrowers may be less effective at shopping for improved mortgage pricing. Another possibility is that borrowers may obtain high-cost mortgages due to predatory or discriminatory pricing practices.
Furthermore, APRs exhibit much variability even for borrowers with similar financial risk characteristicsFurthermore, APRs exhibit much variability even for borrowers with similar financial risk characteristics, because mortgage
transactions are influenced by idiosyncratic factors. Examples of factors that may affect APRs include due to variation in borrowers variation in borrowers’
' down payment sizes, regional variation in appraisal and settlement costs, and variation in seller-paid settlement costs. In other down payment sizes, regional variation in appraisal and settlement costs, and variation in seller-paid settlement costs. In other
words, even if borrowers have sufficient information to understand how their APRs were computed, the range of
circumstances that may be involved in purchase or refinance mortgage transactions makes it difficult to establish awords, even with mortgage APR pricing disclosures, convergence to a representative market market
APR that can be used as a benchmark for APR that can be used as a benchmark forthe sake of comparison. Achieving competitive APR pricing in the primary
mortgage market, therefore, is hindered without the ability of market participants to make appropriate like comparisons.
Congress has passed various consumer protection legislation that maycomparison is challenging. Regulations focusing on particular aspects of APR pricing, therefore, are aimed to account for or minimize unexplained price variation.
Congress has passed consumer protection legislation to reduce the proliferation of high-cost loan offerings in reduce the proliferation of high-cost loan offerings in
the primary mortgage market. For example, the Truth in Lending Act (P.L. 90-301), which applies to all forms of consumer the primary mortgage market. For example, the Truth in Lending Act (P.L. 90-301), which applies to all forms of consumer
credit, requires covered lenders to disclose APR offerings to prospective borrowers. The Real Estate Settlement Procedures credit, requires covered lenders to disclose APR offerings to prospective borrowers. The Real Estate Settlement Procedures
Act (P.L. 93-533Act (P.L. 93-533) requires disclosure of various settlement fees to borrowers. The) and the Home Mortgage Disclosure Act (P.L. 94-200 Home Mortgage Disclosure Act (P.L. 94-200) requires) require disclosure of the various settlement fees to
borrowers and the reporting of mortgage pricing information to regulators the reporting of mortgage pricing information to regulators, respectively, which may facilitate more
. These disclosure requirements may promote greater transparency and competitive transparency and competitivemarket pricing in the primary mortgage market. The Home Ownership Equity Protection Act pricing in the primary mortgage market. The Home Ownership Equity Protection Act
((P.L. 103-325) and certain provisions from the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 103-325) and certain provisions from the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203)P.L. 111-
203), which establishes minimum underwriting standards for U.S. mortgage originations, impose higher costs and legal risks impose higher costs and legal risks
on lenders on lenderswhenif they make higher-priced or less affordable loans that could exacerbate housing cost burdens they make higher-priced or less affordable loans that could exacerbate housing cost burdens for borrowers. Although these . Although these
legislative actions may discourage excessive charges, legislative actions may discourage excessive charges,certain requirements—specifically those requiring minimum
incomes—maythey may also limit mortgage credit access to low- and moderate-income borrowers if lenders are reluctant to incur higher limit mortgage credit access to low- and moderate-income borrowers if lenders are reluctant to incur higher
regulatory costs.regulatory costs.
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Contents
Introduction ..................................................................................................................................... 1
Mortgage Pricing Fundamentals ...................................................................................................... 3
The Influence of Disclosure and Reporting Requirements on Mortgage APRs .............................. 8
TILA-RESPA Integrated Disclosures (TRID) ........................................................................... 9
The Home Mortgage Disclosure Act (HMDA) ....................................................................... 10
Introduction of the HMDA Rate Spread and 2008 Modifications ..................................... 11
HMDA Reporting Requirements and Recent Modifications ............................................ 12
Increasing the Costs to Offer High-Cost Mortgages ..................................................................... 14
The Home Ownership Equity and Protection Act ................................................................... 15
The Ability-to-Repay Requirement and Qualified Mortgage Rule ......................................... 17
The Initial 43% Debt-to-Income Requirement for QM Status .......................................... 18
Revisiting and Expansion of the QM Definitions ............................................................. 19
Figures
Figure 1. The Treasury Yield Curve ................................................................................................ 4
Tables
Table 1. Single-Family Mortgage Pricing Example ........................................................................ 6
Contacts
Author Information ........................................................................................................................ 21
Congressional Research Service
Single-Family Mortgage Pricing and Primary Market Policy Issues
Introduction
dwelling, which is being financed by the loan.dwelling, which is being financed by the loan.1 This report focuses on1 In the the primary market, , the
market where loan applicants (who, if approved, becomeeligible borrowers borrowers) obtain mortgages from loan obtain mortgages from loan
originators and lenders.2 U.S. mortgages may have different maturities—the period of time that
the borrower has to repay the loan, typically 15 or 30 years. Mortgages can be repaid either in
fixed rate or adjustable (variable) rate installment payments over the maturity term.3 These
differences influence the overall price of mortgages. For example, mortgages with shorter
maturity terms are likely to have lower prices relative to those with longer maturities. Because the
price of adjustable rate mortgages (ARMs) fluctuate over their maturity terms with linked interest
rates, determining how expensive they are relative to fixed rate mortgages is more difficult.
Furthermore, mortgage prices reflect the total cost to borrowers if their loans are repaid as
scheduled and held to full maturity. The actual price paid by borrowers, however, must be
calculated at the point when their mortgage obligations were terminated.
originators and lenders.2 If the primary mortgage market is competitive, then numerous transactions between borrowers and lenders would be expected to avert excessive mortgage pricing outcomes. However, achieving fair market mortgage prices can be challenging due to customizable price configurations and difficulties in making like comparisons.
A mortgage price consists of two components—the coupon (i.e., monthly interest rate costs) A mortgage price consists of two components—the interest rate and the upfront costs. The and the upfront costs. The
interest rate component is based upon an applicable risk-free rate (generally, a U.S. Treasury interest rate component is based upon an applicable risk-free rate (generally, a U.S. Treasury
interest rate) and then adjusted for the borrower’s default risk. The upfront component consists of
fees—some fees associated with the housing purchase transaction and some linked to obtaining
the mortgage that are not incorporated into the interest rateinterest rate) and then adjusted for borrower risks. Despite inclusion of some fees in the coupon, most fees appear in the upfront component. These charges may include loan origination fees (e.g., costs to purchase credit reporting data and verify borrowers' identities, incomes, and employment), appraisal fees, and settlement service fees. The price or total cost of a mortgage, . The price or total cost of a mortgage,
the annual percentage rate (APR), is the sum of the interest rate and various upfront fees the annual percentage rate (APR), is the sum of the interest rate and various upfront fees
expressed as a percentage. For any given APR, a expressed as a percentage. For any given APR, atrade-off exists that allows a borrowerborrower can choose to pay to pay
either higher upfront costs to lower the either higher upfront costs to lower theinterestcoupon rate or lower upfront fees for a higher rate or lower upfront fees for a higher interestcoupon rate. rate.
Borrowers with less cash on hand, for example, may prefer to roll more costs into the Borrowers with less cash on hand, for example, may prefer to roll more costs into theinterest rate
to be paid over the life of the mortgagecoupon and repay them over the mortgage lifespan. Some borrowers may prefer . Some borrowers may prefer payingto pay more costs upfront more costs upfront to
and maintain lower mortgage payments over the loan life. Because borrowers can choose APR configurations to benefit their budgets, mortgage cost comparisons are not so straightforward.maintain lower mortgage payments over the loan life.
Some borrowers are likely to obtain high-cost residential mortgage loans for at least five possible
reasons. First, borrowers with weak credit histories face higher borrowing costs (than those with
better credit histories), because lenders typically require more compensation commensurate with
taking greater credit (i.e., default) risks. Second, some borrowers may not have shopped for
mortgages with lower rates and fees. Third, despite applicable laws and regulations (discussed in
this report) aimed at reducing them, fees associated with obtaining mortgages may not have been
adequately disclosed to borrowers when they entered into the lending transaction. Fourth,
borrowers may have obtained high-cost loans as a result of discrimination. Some research has
found that minorities are more likely to pay rates above specified pricing thresholds (prior to
1 A single-family mortgage is a loan secured (i.e., collateralized) by a residential dwelling having at least one and no
more than four separate units.
2 For the purposes of this report, the terms loan originator and lender may be used interchangeably. Loan originators
interact directly with applicants and facilitate the mortgage transactions to consummation. A lender acquires the funds
used to make the loan and retains the mortgage default and other embedded risks. However, a lender can originate
mortgages directly or outsource this task to another party, commonly referred to as a mortgage broker. The distinction
can be important in certain legal and regulatory contexts that are beyond the scope of this report. For example, see the
description of the “True Lender” doctrine in CRS Report R45081, Banking Law: An Overview of Federal Preemption
in the Dual Banking System, by Jay B. Sykes.
3 For more detailed information about the primary market and mortgage characteristics, see CRS Report R42995, An
Overview of the Housing Finance System in the United States, by Katie Jones, Darryl E. Getter, and Andrew P. Scott.
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controlling for some related borrower characteristics).4 Fifth, excessive mortgage pricing may Fifth, excessive mortgage pricing may
result from forms of predatory lending.result from forms of predatory lending.55 In short, mortgage loans may be expensive for a variety In short, mortgage loans may be expensive for a variety
of reasons and subsequently contribute to housing cost burdens.of reasons and subsequently contribute to housing cost burdens.6
Over the years, 6
Congress has enacted legislation intended to promote transparency and Congress has enacted legislation intended to promote transparency and reduceabate the the
proliferation of high-cost loan offerings in the primary mortgage market. The following selected proliferation of high-cost loan offerings in the primary mortgage market. The following selected
laws may facilitate competitive pricing in the primary mortgage market:laws may facilitate competitive pricing in the primary mortgage market:
The Truth in Lending Act of 1968 (TILAThe Truth in Lending Act of 1968 (TILA;, P.L. 90-301) applies to all forms of P.L. 90-301) applies to all forms of
consumer credit.consumer credit.77 TILA requires covered lenders to disclose the total cost of TILA requires covered lenders to disclose the total cost of
credit, which includes the loan rate and fees, in the form of an APR.credit, which includes the loan rate and fees, in the form of an APR.
The Real Estate Settlement Procedures Act of 1974 (RESPAThe Real Estate Settlement Procedures Act of 1974 (RESPA; , P.L. 93-533P.L. 93-533) )
requires lenders, mortgage brokers, requires lenders, mortgage brokers, orand servicers of home loans to provide servicers of home loans to provide
borrowers with pertinent and timely disclosures regarding the nature and costs of borrowers with pertinent and timely disclosures regarding the nature and costs of
the real estate settlement or closing costs.the real estate settlement or closing costs.88 Settlement costs, also known as Settlement costs, also known as
closing costs, include fees for appraisals, title searches, document preparation, closing costs, include fees for appraisals, title searches, document preparation,
and processing services—various costs associated with obtaining the mortgage and processing services—various costs associated with obtaining the mortgage
itself (as opposed to costs of the residential property).itself (as opposed to costs of the residential property).
The Home Mortgage Disclosure Act of 1975 (HMDAThe Home Mortgage Disclosure Act of 1975 (HMDA; , P.L. 94-200) requires P.L. 94-200) requires
disclosure of mortgage origination information.disclosure of mortgage origination information.99 The ability to observe mortgage The ability to observe mortgage
origination patterns allows regulators to determine where further investigation of origination patterns allows regulators to determine where further investigation of
geographical discrimination, also known as redlining, may be necessary to geographical discrimination, also known as redlining, may be necessary to
increase credit access to creditworthy individuals and discourage discriminatory increase credit access to creditworthy individuals and discourage discriminatory
loan markup pricing practices.loan markup pricing practices.10
10
The Fair Credit Reporting Act of 1970 regulates the activities of the consumer The Fair Credit Reporting Act of 1970 regulates the activities of the consumer
credit reporting industry and is implemented by the Consumer Financial credit reporting industry and is implemented by the Consumer Financial
Protection Bureau (CFPB). Credit reporting agencies (CRAs) are firms that
prepare consumer reports based upon individuals’ financial transactions history
data.11 CRA information can subsequently be used to compute a credit score, a
4 See Neil Bhutta and Aurel Hizmo, “Do Minorities Pay More for Mortgages?,” Review of Financial Studies, vol. 34,
no. 2 (February 2021), pp. 763-789; and Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, “Higher-Priced
Home Lending and the 2006 HMDA Data,” Federal Reserve Bulletin, September 2006.
5 Predatory loans generally have provisions that are not beneficial to borrowers. However, while excessively high fees
or interest rates may be attributes of predatory loans, not all loans with high interest rates and fees are predatory. Some
borrowers with poor credit histories may have to accept high rates if they wish to borrow from any lender. For more on
the complications of defining predatory lending, see James H. Carr and Lopa Kolluri, Predatory Lending: An
Overview, Fannie Mae Foundation, 2001.
6 A cost-burdened household is one with a monthly housing cost—either to own or rent—that exceeds 30% of its
monthly income. See U.S. Department of Housing and Urban Development (HUD), Defining Housing Affordability,
August 14, 2017, https://www.huduser.gov/portal/pdredge/pdr-edge-featd-article-081417.html.
7 TILA is contained in Title I of the Consumer Credit Protection Act, P.L. 90-301, 81 Stat. 146, as amended by 15
U.S.C. §§1601 et seq.
8 P.L. 93-533, 88 Stat. 1724, 12 U.S.C. §§2601-2617.
9 P.L. 94-200, 12 U.S.C. §§2801-2809.
10 The Equal Credit Opportunity Act of 1974 (P.L. 94-239) prohibits creditors from discriminating against applicants
on the basis of race, color, religion, national origin, sex, marital status, or age or because the applicant receives public
assistance.
11 P.L. 91-508, Title VI, §601, 84 Stat. 1128 (1970), codified as amended at 15 U.S.C. §§1681-1681x. For the legal
definition, see 12 C.F.R. §1090.104, “Consumer Reporting Market,” http://www.ecfr.gov/cgi-bin/text-idx?SID=
c13cb74ad55c0e8d6abf8d2d1b26a2bc&mc=true&node=se12.9.1090_1104&rgn=div8. The Fair Credit Reporting Act,
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metric used to predict the probability that a borrower would default on a loan.
Because these third-party firms independently assess borrower credit risk, this
technology promotes greater competition among lenders.12
Protection Bureau (CFPB).11 Accurate credit report information can improve the pricing of loan default risk for borrowers. Congress has also enacted legislation that imposes higher costs and legal risks on lenders when Congress has also enacted legislation that imposes higher costs and legal risks on lenders when
they make higher-priced loans, which arguably has the effect of discouraging practices that would they make higher-priced loans, which arguably has the effect of discouraging practices that would
result in expensive or predatory loan offeringsresult in expensive or predatory loan offerings.
:The Home Ownership Equity Protection Act of 1994 (HOEPAThe Home Ownership Equity Protection Act of 1994 (HOEPA; , P.L. 103-325P.L. 103-325) )
amends TILA to require additional reporting of high-cost refinance and other amends TILA to require additional reporting of high-cost refinance and other
non-purchase loans secured by primary (owner-occupied) residences.non-purchase loans secured by primary (owner-occupied) residences.13
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act(Dodd-Frank Act; , P.L. 111-203) contains many consumer protection provisions, P.L. 111-203) contains many consumer protection provisions,
among other things. Examples include establishing the CFPB to implement and among other things. Examples include establishing the CFPB to implement and
enforce federal consumer financial laws while ensuring consumersenforce federal consumer financial laws while ensuring consumers’' access to access to
financial products and services. The CFPB has regulatory authority over banking financial products and services. The CFPB has regulatory authority over banking
and nonbanking firms that offer consumer financial products. The Dodd-Frank and nonbanking firms that offer consumer financial products. The Dodd-Frank
Act also created the ability-to-repay (ATR) requirement, implemented by the Act also created the ability-to-repay (ATR) requirement, implemented by the
CFPB, to establish minimum standards that all creditors must consider during the CFPB, to establish minimum standards that all creditors must consider during the
underwriting of U.S. residential mortgage originations. Lenders may reduce their underwriting of U.S. residential mortgage originations. Lenders may reduce their
potential legal liabilities by demonstrating proof of compliance with ATR via potential legal liabilities by demonstrating proof of compliance with ATR via
originating qualified mortgages, discussed in the last section of this report.originating qualified mortgages, discussed in the last section of this report.
This report begins by explaining mortgage pricing fundamentals in the primary market. Next, the This report begins by explaining mortgage pricing fundamentals in the primary market. Next, the
legislative and regulatory approaches to facilitate legislative and regulatory approaches to facilitatecompetitive mortgage loan pricingreasonable market pricing in the mortgage market are are
discussed in two discussed in twoparts. First, increased market transparency resulting from mandatory mortgage
sections. First, mandatory interest rate and associated fee disclosures are interest rate and associated fee disclosures arediscussed. Next, requirements that imposedesigned to enhance market transparency. Second, to minimize excessive market pricing, higher higher
costscosts are imposed on lenders on lenders thatif they offer mortgages with less affordable or desirable terms offer mortgages with less affordable or desirable terms, which minimizes
excessive market pricing, are discussed. In certain cases, however, lenders. In certain cases, however, lenders’' avoidance of higher avoidance of higher
costs may limit credit access to some qualified low- and moderate-income borrowers.costs may limit credit access to some qualified low- and moderate-income borrowers.
Mortgage Pricing Fundamentals
Generally speaking, all loans, including mortgages, require some minimum compensation
adjusted for additional risks. The slope of the yield curve (shown in Figure 1) consists of the
interest rates of return that lenders could receive by
Mortgage Pricing Fundamentals
Mortgage pricing generally begins with a baseline rate that provides compensation to a lender, which is equivalent to holding a bond with a guaranteed return of principal and interest. Supplementary charges are then added to the baseline rate to account for specific financial risks that threaten the guaranteed return. The yield curve slope (in Figure 1) illustrates the returns from lending to the U.S. Treasury (i.e., purchasing lending to the U.S. Treasury (i.e., purchasing
U.S. Treasury bonds) at different maturitiesU.S. Treasury bonds) at different maturities at no risk. U.S. Treasury rates (yields) are . U.S. Treasury rates (yields) are considered
risk-free base rates because they lack default (credit) risk andused by lenders as baseline rates because they lack virtually any default/credit risk or any prepayment risk. The federal . The federal
government governmenthas never repaid a Treasury obligation late or failed to repay, both of whichdoes not repay its Treasury obligations late or has failed to repay—both events would be treated as would be
considered defaults. Likewise, the federal government never repays its obligations early, defaults. Likewise, the federal government never repays its obligations early, which
would be consideredreferred to as a prepayment. a prepayment. AllBecause all principal and interest payment obligations are paid as scheduled—never early or late—to holders of Treasury securities, Treasury yields principal and interest payment obligations are paid as
the Fair Debt Collection Practices Act, and the Equal Credit Opportunity Act are all consumer credit protection
amendments included in the Consumer Credit Protection Act (P.L. 90-321).
12 Lenders can assess the financial risks of prospective borrowers faster and subsequently offer competitively priced
mortgage loans that factor in the associated risk probabilities. See Board of Governors of the Federal Reserve System,
Report to Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit, submitted to the
Congress pursuant to Section 215 of the Fair and Accurate Credit Transactions Act of 2003, August 2007,
https://www.federalreserve.gov/boarddocs/rptcongress/creditscore/introduction.htm.
13 TILA is contained in Title I of the Consumer Credit Protection Act, P.L. 90-301, 81 Stat. 146, as amended by 15
U.S.C. §§1601 et seq. TILA requires lenders to disclose the cost of credit and repayment terms of mortgage loans
before borrowers enter into any transactions. The Federal Reserve Board implements TILA through Regulation Z.
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scheduled to holders of Treasury securities who rely on the predictability of cash flows. Treasury
rates, therefore, are considered are considered risk-free rates. Lenders, therefore, offer mortgage rates above baseline risk-free rates to receive supplementary risk-free because repayments have never been late or early.
Lenders offer loan rates above the risk-free base rate to receive compensation for taking on the compensation for taking on the
additional default and prepayment risks of private sector borrowers. additional default and prepayment risks of private sector borrowers.If unable to receive
additional compensation for taking on additional risks, lenders would simply purchase risk-free
Treasuries and receive compensation commensurate for taking no risk over a designated time
period.
Snapshot Taken on July 1, 2018Snapshot Taken on July 1, 2018
Source: U.S. Department of Treasury, Daily Treasury Yield Curve Rates.U.S. Department of Treasury, Daily Treasury Yield Curve Rates.
Notes: The July 1, 2018, snapshot was chosen to avoid unusual anomalies that are likely to affect the shape of The July 1, 2018, snapshot was chosen to avoid unusual anomalies that are likely to affect the shape of
the yield curve, such as the Great Recession of 2008 or the COVID-19 pandemic.the yield curve, such as the Great Recession of 2008 or the COVID-19 pandemic.
Conventional conforming 30-year mortgages are typically Conventional conforming 30-year mortgages are typically risk-adjusted for prepayment and for prepayment and
default risks that are default risks that arenon-existentvirtually nonexistent when lending to the U.S. federal government. when lending to the U.S. federal government.1412 Rather than use Rather than use
a comparable 30-year U.S. Treasury rate as the benchmark minimum compensation rate, which a comparable 30-year U.S. Treasury rate as the benchmark minimum compensation rate, which
would correspond with the maturity length of a 30-year mortgage, a Treasury with a shorter would correspond with the maturity length of a 30-year mortgage, a Treasury with a shorter
maturity is frequently used to reflect the prepayment risk of most borrowers. Specifically, a 10-maturity is frequently used to reflect the prepayment risk of most borrowers. Specifically, a 10-
year Treasury bond is considered a better approximation of the prepayment risk associated with year Treasury bond is considered a better approximation of the prepayment risk associated with
the traditional 30-year fixed rate mortgage.the traditional 30-year fixed rate mortgage.1513 Following a decline in mortgage rates, some Following a decline in mortgage rates, some
14 A conventional conforming mortgage is one that meets the eligibility criteria set by Fannie Mae and Freddie Mac,
including the dollar limits set annually by the Federal Housing Finance Agency (FHFA).
15 For simplicity, the discussion in this report focuses on the conventional 30-year fixed rate mortgage. However, some
mortgage products are designed specifically for borrowers expected to prepay even before 10 years. For example,
ARMs have coupons benchmarked to an index such as a constant maturity Treasury (one-year) rate, calculated using
the weekly average yield of U.S. Treasury securities. ARM coupons may change annually with caps that restrict either
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borrowers may repay their existing mortgages early by refinancing (i.e., paying off an old borrowers may repay their existing mortgages early by refinancing (i.e., paying off an old
mortgage and obtaining a new one with a lower interest rate). Borrowers also prepay if they sell mortgage and obtaining a new one with a lower interest rate). Borrowers also prepay if they sell
their homes before fully repaying their mortgages. Because borrowers are their homes before fully repaying their mortgages. Because borrowers arelessnot likely to stay in the likely to stay in the
same mortgage same mortgageloanloans for 30 years, the estimated lifespan for 30-year mortgages better aligns with for 30 years, the estimated lifespan for 30-year mortgages better aligns with
that of 10-year Treasury bonds.that of 10-year Treasury bonds.16 In addition14 Consequently, the rates of 30-year mortgages and 10-year Treasury , the rates of 30-year mortgages and 10-year Treasury
bonds tend to move in similar directionsbonds tend to move in similar directions, at similar speeds and magnitudes, thus indicating at similar speeds and magnitudes, thus indicating
possible mortgage market irregularities when these rate movements do not coincide.possible mortgage market irregularities when these rate movements do not coincide.17
15 Mortgage rates are also adjusted for default riskMortgage rates are also adjusted for default risk. Specifically, additional basis points
commensurate with the additional default risk of a borrower are incorporated into the loan’s
coupon. A basis point is one-hundredth of 1% (0.01%), meaning that 100 basis points equal 1%.
A loan’s coupon, which is analogous to a borrower’s monthly payment, includes the annual
interest rate, discussed in more detail in the textbox below.
A loan's coupon, which is eventually converted to a borrower's monthly payment, consists of the baseline risk-free rate, the adjustment for prepayment risk, and the adjustment for default risk. The coupon may be expressed as a percentage of the face value of the loan principal expressed as a percentage of the face value of the loan principal (from issue date until maturity) or in terms of basis points, which is one-hundredth of 1% (0.01%), meaning that 100 basis points equal 1%. The term risk-based pricingfrom issue date until
maturity as well as some additional fees spread over the life of the loan. The term risk-based
pricing refers to the practice of charging borrowers with greater default propensities higher refers to the practice of charging borrowers with greater default propensities higher
premiums to reimburse lenders for potential losses. Although higher-risk borrowers pay more for premiums to reimburse lenders for potential losses. Although higher-risk borrowers pay more for
their mortgages relative to lower-risk borrowers, risk-based pricing their mortgages relative to lower-risk borrowers, risk-based pricingcan resultresults in fewer in fewer credit
denials and greater credit accessibility. Borrowers can pay for the default risk they pose either in denials and greater credit accessibility. Borrowers can pay for the default risk they pose either in
the form of additional basis points or by separately purchasing mortgage insurance, usually the form of additional basis points or by separately purchasing mortgage insurance, usually
assessed as a combination of an upfront fee and additional basis points.assessed as a combination of an upfront fee and additional basis points.18
16
Consumer Credit Scores and Risk-Based Pricing19
Pricing17
Credit reporting agenciesCredit reporting agencies (CRAs), which are regulated under the Fair Credit Reporting Act, , which are regulated under the Fair Credit Reporting Act, col ectcollect data that data that
frequently includes historical information about credit repayment, tenant payment, employment, insurance claims, frequently includes historical information about credit repayment, tenant payment, employment, insurance claims,
and check writing and account management. Consumer filesand check writing and account management. Consumer files, however, do not contain information on consumer do not contain information on consumer
income or assets. Consumer reports generally cannot include information on items such as race or ethnicity, income or assets. Consumer reports generally cannot include information on items such as race or ethnicity,
religious or political preference, or medical history. religious or political preference, or medical history.CRAPayment information information can subsequentlyfrom a credit report can be used to be used to compute a
the size of the interest rate change (up or down) in any given year or the minimum or maximum interest rate allowed
over the life of the loan. Mortgages known as hybrid ARMs have fixed coupons for several years and then adjust
periodically. Despite the risk of rising interest rates, borrowers who anticipate prepaying their ARMs may incur lower
overall interest expense relative to what they would have paid with a traditional fixed rate mortgage over a similar short
horizon. For more information, see HUD, “Adjustable Rate Mortgages (ARM),” https://www.hud.gov/
program_offices/housing/sfh/ins/203armt; CFPB, “For an Adjustable-Rate Mortgage (ARM), What Are the Index and
Margin, and How Do They Work?,” November 15, 2019, https://www.consumerfinance.gov/ask-cfpb/for-an-
adjustable-rate-mortgage-arm-what-are-the-index-and-margin-and-how-do-they-work-en-1949/; and U.S. Department
of Treasury, “Interest Rates—Frequently Asked Questions,” https://home.treasury.gov/policy-issues/financing-the-
government/interest-rate-statistics/interest-rates-frequently-asked-questions.
16 See Joe Mattey, Mortgage Interest Rates, Valuation, and Prepayment Risk, Federal Reserve Bank of San Francisco,
October 9, 1998, https://www.frbsf.org/economic-research/publications/economic-letter/1998/october/mortgage-
interest-rates-valuation-and-prepayment-risk/.
17 See William R. Emmons, Why Haven't Mortgage Rates Fallen Further?, Federal Reserve Bank of St. Louis, June 15,
2020, https://www.stlouisfed.org/on-the-economy/2020/june/why-havent-mortgage-rates-fallen-further.
18 Mortgage insurance is usually required for borrowers lacking either a down payment or home equity that equals at
least 20% of the property value. If a borrower defaults on a mortgage obligation, mortgage insurance reimburses the
lender for the loss. The Federal Housing Administration and the Veterans’ Administration are federal agencies that
provide mortgage insurance; however, borrowers may get private mortgage insurance, which may be less expensive for
more creditworthy borrowers. Generally speaking, default risk premiums frequently have an upfront component, which
is paid in a lump sum when the loan is closed, and an ongoing component, which is collected over the life of the loans.
The ongoing component of the default fee typically manifests itself as an increase in the mortgage coupon. The upfront
component of the default fee typically appears as part of the closing costs.
19 See CRS Report R44125, Consumer Credit Reporting, Credit Bureaus, Credit Scoring, and Related Policy Issues, by
Cheryl R. Cooper and Darryl E. Getter.
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consumer credit score, a (numeric) metric that can be used to predict a variety of financial behaviors such as the
likelihood of loan default. Fol owing computation of a credit score, the amount that a borrower should be charged
to cover default risk can be determined. Generally speaking, credit scores and default risk premiums should be
inversely related. Borrowers with higher credit scores would be expected to pay lower default risk premiums;
borrowers with lower credit scores would be expected to pay higher premiums.
The servicing fee is an example of a fee typically included in the mortgage coupongenerate a consumer credit score, a (numeric) metric that can be used to predict a variety of financial behaviors such as a probability of loan default. A credit score, therefore, is used to calculate a borrower's premium for default risk. Credit scores and default risk premiums are inversely related. Borrowers with higher credit scores typically pay lower default risk premiums, while borrowers with lower credit scores typically pay higher premiums. Because these third-party firms in the credit reporting and scoring industry independently assess borrower credit risk, this technology promotes greater competition in the mortgage market by putting downward pressure on default premiums.18
A loan's coupon may also include some additional fees (such as the servicing fee) also spread over the life of the loan. Following . Following
origination of a single-family mortgage, a mortgage servicer receives a monthly fee to perform origination of a single-family mortgage, a mortgage servicer receives a monthly fee to perform
various administrative tasks—collecting and remitting the principal and interest payments to the various administrative tasks—collecting and remitting the principal and interest payments to the
mortgage lender; managing the borrowermortgage lender; managing the borrower’'s escrow account; processing the loan title once paid in s escrow account; processing the loan title once paid in
full; and administering loss mitigation (e.g., forbearance plans) or foreclosure resolution on full; and administering loss mitigation (e.g., forbearance plans) or foreclosure resolution on
behalf of the lender if the borrower falls behind or fails to make full payment.behalf of the lender if the borrower falls behind or fails to make full payment.19 A mortgage A mortgage
servicing right generates a servicing fee typically averaging 25 basis points (0.25% or $250 per servicing right generates a servicing fee typically averaging 25 basis points (0.25% or $250 per
$100,000 of an outstanding mortgage balance) per $100,000 of an outstanding mortgage balance) permonth.20
Although theyear.20
The mortgage coupon mortgage coupon rate typically quoted to a borrower typically quoted to a borrower includes the adjustments for
prepayment and default risks plus the mortgage servicing fee, it still doesstill may not reflect the total loan not reflect the total loan
price. Instead, the APR represents the price. Instead, the APR represents the total annual borrowing costs of a loan expressed as a annual borrowing costs of a loan expressed as a
percentage. The APR calculation includes percentage. The APR calculation includes both the mortgage coupon the mortgage coupon(spread over the life of the
loan) andand the additional fees that are paid up front. additional fees that are paid up front.21 Additional21 As previously stated, upfront charges may include loan upfront charges may include loan
origination fees, the costs of appraisals, title insurance, and upfront premiums charged to cover origination fees, the costs of appraisals, title insurance, and upfront premiums charged to cover
mortgage default riskmortgage default risk. Table 1 summarizes the APR calculations—the sum of the mortgage summarizes the APR calculations—the sum of the mortgage
coupon and upfront costs.coupon and upfront costs.
Table 1. Simplified Single-Family Mortgage Pricing Example
Assumes Standard 30-Year Fixed Rate MortgageAssumes Standard 30-Year Fixed Rate Mortgage
Line Item
Percent
Basis Points
Payment Frequency
Prepayment Risk-Adjusted Base Coupon Rate Prepayment Risk-Adjusted Base Coupon Rate
2.82%
282
ongoing (monthly)
(Assume 10-year Treasury Base Rate Applied (Assume 10-year Treasury Base Rate Applied
to 30-year Mortgage)to 30-year Mortgage)
Default Risk (Ongoing Component of
0.56%
56
ongoing (monthly)
Insurance Premium/Guarantee Fee)
Servicing Fee
0.25%
25
ongoing (monthly)
MORTGAGE COUPON (Subtotal)
3.63%
363
Origination Fee
0.50%
50
upfront
Closing Costs (e.g., Settlement Costs, Upfront Closing Costs (e.g., Settlement Costs, Upfront
0.70%
70
upfront
Component of a Mortgage Insurance Component of a Mortgage Insurance
Premium/Guarantee Fee)Premium/Guarantee Fee)
AVERAGE PERCENTAGE RATE (APR)
4.83%
483
Source: CRS hypothetical example.
20 See Karan Kaul et al., Options for Reforming the Mortgage Servicing Compensation Model, Urban Institute, April
19, 2019, https://www.urban.org/sites/default/files/publication/100131/
options_for_reforming_the_mortgage_servicing_compensation_model_0.pdf.
21 See Board of Governors of the Federal Reserve System, “Determination of Finance Charge and Annual Percentage
Rate (‘APR’),” Regulation Z: Truth in Lending, http://www.federalreserve.gov/boarddocs/caletters/2008/0805/08-
05_attachment1.pdf.
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inin Figure
1. The 0.5% origination fee is based upon the average points and fees reported from the Freddie Mac Primary The 0.5% origination fee is based upon the average points and fees reported from the Freddie Mac Primary
Mortgage Market Survey for the week of July 5, 2018. The remaining numbers are arguably feasible assumptions.Mortgage Market Survey for the week of July 5, 2018. The remaining numbers are arguably feasible assumptions.
In sum, a mortgage price consists of In sum, a mortgage price consists of two components—the couponthe ongoing coupon rate and the upfront costs. A 30-year mortgage coupon baseline is typically set to the 10-year Treasury bond rate and the upfront costs. The
mortgage coupon for a 30-year fixed rate mortgage includes an adjustment for the prepayment
risk of homebuyers; it typically follows a 10-year Treasury bond due to the similarities of their due to the similarities of their
lifespans. A mortgage coupon is also adjusted for a borrower’s default risk. The upfront cost
component consists of fees—some that can be incorporated into the mortgage couponlifespans. The coupon for a 30-year fixed rate mortgage includes an adjustment for borrower prepayment and default risks. Various fees (e.g., (e.g.,
servicing fees) and some charged separately as upfront fees. The APR, the price or total mortgage
cost,servicing fees) can be incorporated in the mortgage coupon, separately as an upfront fee, or divided among both. The APR (i.e., the mortgage price) is the sum of the coupon and various upfront costs expressed as a percentage. is the sum of the coupon and various upfront costs expressed as a percentage.
In practice, lenders typically provide mortgage originators with In practice, lenders typically provide mortgage originators with rate sheets that that are conceptually conceptually are
derived similarly to the process described above to establish mortgage coupons. derived similarly to the process described above to establish mortgage coupons.Lender rate
sheets listA lender rate sheet lists either a set of interest rates with the various risk adjustments or a set of loan-level price either a set of interest rates with the various risk adjustments or a set of loan-level price
adjustments to add to a designated minimum base rate.adjustments to add to a designated minimum base rate.22 The various coupons or22 The loan-level price loan-level price
adjustments adjustments to the mortgage coupons capture differences in borrower characteristics (e.g., credit score, loan-to-value ratiocapture differences in borrower characteristics (e.g., credit score, loan-to-value ratio,
etc.); loan features (e.g., fixed rate, adjustable rate, investment property, cash-out refinance, ); loan features (e.g., fixed rate, adjustable rate, investment property, cash-out refinance,
amount, etc.amount); and other financial risk characteristics that would require supplemental ); and other financial risk characteristics that would require supplemental
compensation for lenders.compensation for lenders.23
23 The Secondary Mortgage Market Influence on Primary Mortgage Pricing
By bolstering liquidity in the secondary mortgage market—the market in which primary mortgage originations can By bolstering liquidity in the secondary mortgage market—the market in which primary mortgage originations can
be sold and bought by investors—the be sold and bought by investors—thegovernment-sponsored enterprises (e.gEnterprises (i.e., Fannie Mae, Freddie Mac) promote ., Fannie Mae, Freddie Mac) promote
lower minimum base rates, which are used as the floors for mortgage coupons.lower minimum base rates, which are used as the floors for mortgage coupons.2424 After purchasing mortgage After purchasing mortgage
originations, these entities retain the default risk and then sell to private investors the remaining prepayment risk originations, these entities retain the default risk and then sell to private investors the remaining prepayment risk
(in the form of mortgage-backed securities [MBSs]).(in the form of mortgage-backed securities [MBSs]).25 If25 If investors consider financial products with only prepayment risk (as opposed financial products with only prepayment risk (as opposed
to both types of mortgage risks) to both types of mortgage risks)are considered by investors to be more attractive investments, then the increase to be more attractive investments, then the increase
in funds supplied for primary market mortgage originations in funds supplied for primary market mortgage originationswil will result in lower initial minimum base rates.result in lower initial minimum base rates.
Additionally, secondary mortgage markets mitigate the emergence of Additionally, secondary mortgage markets mitigate the emergence of liquiditypremiumspremiums. A liquidity premium is a . A liquidity premium is a
transactions cost that arises because the buying or selling of financial assets (e.g., whole mortgages with both transactions cost that arises because the buying or selling of financial assets (e.g., whole mortgages with both
default and prepayment risks) cannot occur quickly. A buyer must pay a liquidity premium for (or a seller must default and prepayment risks) cannot occur quickly. A buyer must pay a liquidity premium for (or a seller must
discount the value of) an asset to hasten the incidence of a transaction. MBSs traded in secondary markets tend to discount the value of) an asset to hasten the incidence of a transaction. MBSs traded in secondary markets tend to
trade with lower liquidity premiums compared to whole mortgages.trade with lower liquidity premiums compared to whole mortgages.2626 Nevertheless, when liquidity premiums Nevertheless, when liquidity premiums
emerge in secondary markets, they would likely appear in minimum base rates as additional basis points above the emerge in secondary markets, they would likely appear in minimum base rates as additional basis points above the
initial adjustment for prepayment risk (not including the other loan level price adjustments).initial adjustment for prepayment risk (not including the other loan level price adjustments).2727 Stated differently, if the amount of basis points exceeds the prepayment risk adjustment amount Stated differently, if
22 For example, Fannie Mae has a required net/commitment yield, which does not include a servicing fee, and is used as
a minimum base yield. Originators deliver mortgages to Fannie Me after the relevant loan-level price adjustments have
been applied to the commitment yields. See Fannie Mae, “Required Net Yields to 1985: 30-Year,”
https://singlefamily.fanniemae.com/pricing-execution/required-net-yields-1985; and Fannie Mae, “Loan-Level Price
Adjustment (LLPA) Matrix,” https://singlefamily.fanniemae.com/media/9391/display.
23 Some lenders establish base coupons representative of the risk linked to the average prime credit, owner-occupied
borrowers. Consequently, any additional loan-level price adjustments represent pricing for riskier, non-prime loans.
24 See CRS In Focus IF11715, Introduction to Financial Services: The Housing Finance System, by Darryl E. Getter.
25 Fannie Mae and Freddie Mac have also implemented nationwide standardization of mortgage products and borrower
underwriting criteria, which enhances the transparency of the underlying credit risk of mortgage borrowers and
increases the attractiveness of trading mortgage default risk. For more information, see CRS Report R46746, Fannie
Mae and Freddie Mac: Recent Administrative Developments, by Darryl E. Getter.
26 Prior to their conservatorship, Fannie Mae and Freddie Mac could actively trade their own MBSs in the over-the-
counter bond market to abate rising liquidity premiums. For more information, see CRS Report R46746, Fannie Mae
and Freddie Mac: Recent Administrative Developments, by Darryl E. Getter.
27 See Nina Boyarchenko, Andreas Fuster, and David O. Lucca, Understanding Mortgage Spreads, Federal Reserve
Bank of New York, April 2015, https://www.frbsf.org/economic-research/files/S03_P2_AndreasFuster.pdf.
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the amount of basis points exceeds the adjustment for prepayment risk (e.g., the difference between the 30-year (e.g., the difference between the 30-year
and the 10-year Treasury rates), then the and the 10-year Treasury rates), then theoverageexcess is likely to is likely to representbe indicative of a liquidity premium that MBS investors a liquidity premium that MBS investors
would wouldhave partially or partially or ful y passedfully pass onto borrowers in the primary market. onto borrowers in the primary market.28
28 The Influence of Disclosure and Reporting
Requirements on Mortgage APRs
The law of one price (LOOP) The law of one price (LOOP)statesholds that, under ideal conditions, identical financial securities that, under ideal conditions, identical financial securities
should have identical prices.should have identical prices.29 If both29 In the primary mortgage market, if borrowers (with similar borrowers (with similar financial risk characteristics) and lenders risk characteristics) and lenders
have access to sufficient and equivalent information, then achieving the LOOP—or at least have access to sufficient and equivalent information, then achieving the LOOP—or at least
pricing within a tolerable range—pricing within a tolerable range—theoretically should be possible. Less price variability in the
primary market not only enhances transparency of the underlying fees charged to borrowers but
also enhances liquidity in the secondary mortgage market, where mortgages can be bought, sold,
and used to create new tradeable securities (e.g., MBSs).30
Achieving the LOOP in the primary mortgage market, however, is challenging for the following
reasons. First, borrowers are not identical. Less creditworthy borrowers have different
prepayment and default propensities relative to more creditworthy borrowers, and lenders require
higher compensation (yields) for higher-risk borrowers. Second, because borrowers shop for
mortgages less frequently than they shop for other goods and services (e.g., groceries), they are
less likely to be should theoretically be possible. However, achieving the LOOP is challenging. Differences in borrowers' prepayment and default propensities must be factored into their loan pricing.30 Some borrowers are less familiar with all charges and fees associated with mortgage transactionsfamiliar with all charges and fees associated with mortgage transactions. Third,
some borrowers and may may not be awarealso be unaware that they can shop for lower mortgage rates and, in some that they can shop for lower mortgage rates and, in some
cases, settlement fees.cases, settlement fees.31 Fourth, the31 The APR metric also becomes less meaningful in the context of APR metric also becomes less meaningful in the context of
non-traditional mortgage products with features such as balloon payments or term lengths in non-traditional mortgage products with features such as balloon payments or term lengths in
which an adjustable interest rate is locked.which an adjustable interest rate is locked.3232 Furthermore, an APR in isolation is less meaningful Furthermore, an APR in isolation is less meaningful
without relevant comparisons. without relevant comparisons.Even if prospective borrowers have and can understand the
information pertaining to the mortgages offered to them, they are unlikely to have comparable
mortgages with similar amounts and maturity lengths for sake of APR comparison. Hence,
differences in borrowers’ financial risk characteristics, the lack of shopping by some borrowers,
and differences in mortgage products and settlement costs all limit the ability for borrowers to
make relevant comparisons, thus impeding convergence to a competitive APR mortgage price.
Borrowers are unlikely to have access to numerous mortgages with similar payment propensities and term features to make relevant APR comparisons. These challenges impede convergence to a competitive APR that mortgage market participants can use as a real time point of reference.
As previously noted, Congress has enacted various legislation to enhance the disclosure of As previously noted, Congress has enacted various legislation to enhance the disclosure of
mortgage pricing information, which may incidentally reduce price variability and get closer to
achieving the LOOP for some primary market segments. For example, the federal agencies that
guarantee the default risk of mortgages and government-sponsored enterprises (GSEs) such as
Fannie Mae and Freddie Mac have facilitated standardized single-family mortgage underwriting
28 If more liquid investment alternatives exist, then investors would be able to pass more of the liquidity premium onto
borrowers who finance their home purchases with mortgages. For more information, see Jodi Beggs, “Elasticity and
Tax Burden,” ThoughtCo, March 5, 2019, https://www.thoughtco.com/elasticity-and-tax-incidence-1147952.
29 See Owen A. Lamont and Richard H. Thaler, “The Law of One Price in Financial Markets,” Journal of Economic
Perspectives, vol. 17, no. 4 (Fall 2003), pp. 191-202.
30 See CRS In Focus IF11715, Introduction to Financial Services: The Housing Finance System, by Darryl E. Getter;
and CRS Report R46746, Fannie Mae and Freddie Mac: Recent Administrative Developments, by Darryl E. Getter.
31 Darryl E. Getter, “Consumer Credit Risk and Pricing,” Journal of Consumer Affairs, vol. 40, no. 1 (Summer 2006),
pp. 41-63.
32 Regulation Z requires lenders to assume that the interest rate situation at the time of origination will continue for the
term of the loan when calculating the APR for adjustable-rate loans.
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(i.e., loan qualification) requirements at the national level.33 The Federal Housing Financing
Agency, the primary regulator of the GSEs, has also implemented standardized data collection
initiatives for single-family mortgage originations.34 The Fair Credit Reporting Act, which is
implemented by the CFPB, requires accurate and complete reporting of consumer payment
activity to credit reporting agencies.35 Standardized underwriting and improved data accuracy
enhances the ability to price default risk premiums. Moreovermortgage pricing information. For example, TILA and RESPA require certain , TILA and RESPA require certain
disclosures to increase mortgage pricing transparency for borrowers. HMDA and HOEPA have disclosures to increase mortgage pricing transparency for borrowers. HMDA and HOEPA have
reporting requirements when prices exceed certain thresholds.
Consequently, if mortgages satisfy national uniform mortgage underwriting standards, which
usually make them eligible for various federal insurance programs or for purchase by federal and
federally related entities, then they should have similar financial characteristics (e.g., prepayment
and default risk propensities) and, therefore, exhibit less price variability. Mortgage loan prices
are unlikely to converge perfectly to a single price as would be predicted by the LOOP. Instead,
they are more likely to reflect, for example, regional differences in settlement costs that are less
likely to be influenced by competitive forces. Neverthelessreporting requirements when prices exceed certain thresholds. Despite differences in borrowers' financial risks and regional differences in settlement costs, which do not allow for convergence to a single APR, the legislative and administrative , the legislative and administrative
actions discussed in this section actions discussed in this sectionarguably reduce price variation in the primary mortgage market
particularly for prime (creditworthy) borrowerswere designed to reduce APR variation and foster convergence to tighter APR ranges in the primary mortgage market. .
TILA-RESPA Integrated Disclosures (TRID)
A lack of transparency with respect to loan terms and settlement costs can make it difficult for A lack of transparency with respect to loan terms and settlement costs can make it difficult for
consumers to make well-informed decisions when choosing mortgage products. Inadequate consumers to make well-informed decisions when choosing mortgage products. Inadequate
disclosures can make some borrowers more vulnerable to predatory, discriminatory, and disclosures can make some borrowers more vulnerable to predatory, discriminatory, and
fraudulent lending practices. In addition, when costs are hidden from borrowers, they become fraudulent lending practices. In addition, when costs are hidden from borrowers, they become
vulnerable to payment shocks that could possibly lead to financial distress or even foreclosure.vulnerable to payment shocks that could possibly lead to financial distress or even foreclosure.
The adequate disclosure
The adequacy of mortgage of mortgage termsdisclosures is a long-standing issue that has prompted several is a long-standing issue that has prompted several
congressional actions. For example, TILAcongressional actions. For example, TILA, previously implemented by the Federal Reserve
Board, requires lenders to disclose the cost of credit and repayment terms of mortgage loans requires lenders to disclose the cost of credit and repayment terms of mortgage loans
before borrowers enter into any transactions. In addition, RESPAbefore borrowers enter into any transactions. In addition, RESPA, previously implemented by the
Department of Housing and Urban Development (HUD), requires standardized disclosures about requires standardized disclosures about
the settlement or closing costs. Examples of such costs include loan origination fees or points, the settlement or closing costs. Examples of such costs include loan origination fees or points,
credit report fees, property appraisal fees, mortgage insurance fees, title insurance fees, home and credit report fees, property appraisal fees, mortgage insurance fees, title insurance fees, home and
flood insurance fees, recording fees, attorney fees, and escrow account deposits. RESPA also flood insurance fees, recording fees, attorney fees, and escrow account deposits. RESPA also
includes the following provisions:includes the following provisions: (1) providersProviders of settlement services are required to provide of settlement services are required to provide
good faith estimates of the settlement service costs borrowers should expect at the closing of their good faith estimates of the settlement service costs borrowers should expect at the closing of their
mortgage loansmortgage loans; (2) lists.
Lists of the actual closing costs must be provided to borrowers at the time of of the actual closing costs must be provided to borrowers at the time of
closing; and (3) “referral fees” or “kickbacks”closing.
"Referral fees" or "kickbacks" among settlement service providers among settlement service providers are prohibited
tomust not prevent settlement fees from increasing unnecessarily. prevent settlement fees from increasing unnecessarily.
When TILA and RESPA were implemented separately, lenders presented borrowers with separate
TILA and RESPA disclosures. The Dodd-Frank Act The Dodd-Frank Act recently transferred the primary rulemaking transferred the primary rulemaking
and enforcement authority of TILA and RESPA, along with other existing consumer protection and enforcement authority of TILA and RESPA, along with other existing consumer protection
33 See CRS In Focus IF11715, Introduction to Financial Services: The Housing Finance System, by Darryl E. Getter.
34 For example, see FHFA, “Standardizing Mortgage Data through the Uniform Mortgage Data Program,” press
release, October 10, 2017, https://www.fhfa.gov/Media/Blog/Pages/standardizing-mortgage-data-through-the-
UMDP.aspx.
35 See CRS Report R44125, Consumer Credit Reporting, Credit Bureaus, Credit Scoring, and Related Policy Issues, by
Cheryl R. Cooper and Darryl E. Getter.
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laws, to the CFPB.36laws, to the CFPB.33 The Dodd-Frank Act also directed the agency to create a single integrated The Dodd-Frank Act also directed the agency to create a single integrated
disclosure form to satisfy both TILA and RESPA disclosure requirements.disclosure form to satisfy both TILA and RESPA disclosure requirements.37 On November 20,
34 In 2013, the CFPB issued the TILA-RESPA Integrated Disclosure (TRID) final rule.2013, the CFPB issued the TILA-RESPA Integrated Disclosure (TRID) final rule.38
35 The TRID, implemented under Regulation Z, requires disclosures in connection with applying for The TRID, implemented under Regulation Z, requires disclosures in connection with applying for
and closing on a mortgage loan. Consumers must receive two standardized forms: the and closing on a mortgage loan. Consumers must receive two standardized forms: theLoan
Estimate form and the Closing Disclosureloan estimate form and the closing disclosure form form. The loan estimate. The Loan Estimate form, consisting of the good form, consisting of the good
faith estimate of the loan terms and closing costs, must be delivered to the consumer no later than faith estimate of the loan terms and closing costs, must be delivered to the consumer no later than
three business days after the consumer submits a mortgage application. The three business days after the consumer submits a mortgage application. TheClosing Disclosure
closing disclosure form must be received at least three days before settlement of the loan. The final form must be received at least three days before settlement of the loan. The finalcostscost estimates estimates
on the Closing Disclosureon the closing disclosure form may exceed the originally disclosed estimates on the form may exceed the originally disclosed estimates on the Loan
Estimateloan estimate form only by allowable percentages (referred to as tolerances) prescribed by the CFPB. form only by allowable percentages (referred to as tolerances) prescribed by the CFPB.
Since the 2013 final rule, the CFPB has made various amendments to TRID. For example, the Since the 2013 final rule, the CFPB has made various amendments to TRID. For example, the
CFPB amended and clarified various mortgage disclosure provisions in 2017, including CFPB amended and clarified various mortgage disclosure provisions in 2017, including
provisions pertaining to escrow closing notices, construction loans, simultaneous subordinate lien provisions pertaining to escrow closing notices, construction loans, simultaneous subordinate lien
loans, tolerances for the total of payments disclosure, and other disclosure requirements.loans, tolerances for the total of payments disclosure, and other disclosure requirements.3936 In May In May
2018, the CFPB amended TRID to facilitate the ability to pass permissible costs to affected 2018, the CFPB amended TRID to facilitate the ability to pass permissible costs to affected
consumers under circumstances when unanticipated cost increases occurred after consumers under circumstances when unanticipated cost increases occurred afterClosing
Disclosureclosing disclosure forms had been provided, thus mitigating the need for lenders to spread such costs to forms had been provided, thus mitigating the need for lenders to spread such costs to
other consumers by pricing future loans with added margins.other consumers by pricing future loans with added margins.40
37 The Home Mortgage Disclosure Act (HMDA)
HMDA was enacted in 1975 to assist government regulators and the private sector with the HMDA was enacted in 1975 to assist government regulators and the private sector with the
monitoring of anti-discriminatory practices.monitoring of anti-discriminatory practices.4138 HMDA is implemented via Regulation C. The HMDA is implemented via Regulation C. The
Dodd-Frank Act transferred HMDA rulemaking authority, which was initially given to the Dodd-Frank Act transferred HMDA rulemaking authority, which was initially given to the
Federal Reserve Board, to the CFPB.Federal Reserve Board, to the CFPB.4239 Prudential regulators of depository institutions (i.e., banks Prudential regulators of depository institutions (i.e., banks
and credit unions) use the HMDA data to assist with the supervision and enforcement of fair
36 See CFPB, “Consumer Financial Protection Bureau Releases Assessment of TRID Mortgage Loan Disclosure Rule,”
October 1, 2020, https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-
releases-assessment-trid-mortgage-loan-disclosure-rule/.
37 P.L. 111-203, §1098, 12 U.S.C §2603.
38 CFPB, “Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the
Truth in Lending Act (Regulation Z),” 78 Federal Register 79730, December 31, 2013.
39 See CFPB, “Executive Summary of the 2017 TILA-RESPA Rule,” July 7, 2017, https://files.consumerfinance.gov/f/
documents/201707_cfpb_Executive-summary-of-2017-TILA-RESPA-rule.pdf.
40 See CFPB, “Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z),” 83 Federal
Register 19159-19176, May 2, 2018.
41 P.L. 94-200, 12 U.S.C. §§2801-2809. For more information, see CFPB, “Home Mortgage Disclosure Act (HMDA)
Data Collection: What Is the Purpose?,” https://files.consumerfinance.gov/f/documents/cfpb_hmda-data-collection-
pia_122017.pdf.
42 The public HMDA data set is available at the Federal Financial Institutions Examination Council’s website at
http://www.ffiec.gov/hmda/.
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lending compliance.43 The bank prudential regulators also use the HMDA data to assist with
Community Reinvestment Act examinations.44
and credit unions) use the HMDA data to assist with the supervision and enforcement of fair lending compliance.40 The bank prudential regulators also use the HMDA data to assist with Community Reinvestment Act (P.L. 95-128, 12 U.S.C. §§2901-2908) examinations.41
Credit availability in less affluent and minority neighborhoods was of primary concern when Credit availability in less affluent and minority neighborhoods was of primary concern when
HMDA was enacted. Financial institutions allegedly accepted deposits but did not make mortgage HMDA was enacted. Financial institutions allegedly accepted deposits but did not make mortgage
loans in certain neighborhoods. Consequently, institutions covered by HMDA were required to loans in certain neighborhoods. Consequently, institutions covered by HMDA were required to
report home mortgage originations by geographic area, financial institution type, borrower race, report home mortgage originations by geographic area, financial institution type, borrower race,
sex, income, and whether the loans were for home purchase or refinance.sex, income, and whether the loans were for home purchase or refinance.4542 This information This information
would show geographical patterns of mortgage originations and help regulators determine would show geographical patterns of mortgage originations and help regulators determine
localities where further investigation of discrimination, known as redlining, was necessary. In localities where further investigation of discrimination, known as redlining, was necessary. In
1989, Congress expanded HMDA to include the race, sex, and 1989, Congress expanded HMDA to include the race, sex, andborrower income of those income of those
applicants applicantsthatwho were rejected as well as those who were approved. This expansion allowed were rejected as well as those who were approved. This expansion allowed
regulators to monitor differences in mortgage loan denial rates by income, race, and gender. The regulators to monitor differences in mortgage loan denial rates by income, race, and gender. The
following sections discuss further amendments affecting HMDA reporting requirements.following sections discuss further amendments affecting HMDA reporting requirements.
Introduction of the HMDA Rate Spread and 2008 Modifications
While addressing mortgage credit availability concerns, regulators observed issues with respect to While addressing mortgage credit availability concerns, regulators observed issues with respect to
mortgage credit pricing. Beginning in the 1990s, credit became increasingly available for less mortgage credit pricing. Beginning in the 1990s, credit became increasingly available for less
creditworthy borrowers, particularly with wider adoption of credit scoring technology.creditworthy borrowers, particularly with wider adoption of credit scoring technology.4643 Instead Instead
of turning down loan requests for borrowers of lower credit quality, lenders began charging these of turning down loan requests for borrowers of lower credit quality, lenders began charging these
borrowers higher interest rates to compensate for the additional default risks.borrowers higher interest rates to compensate for the additional default risks.4744 Nevertheless, the Nevertheless, the
practice of charging different loan rates to different groups led regulators to question the extent practice of charging different loan rates to different groups led regulators to question the extent
that mortgage pricing patterns reflected differences in credit risk rather than discrimination.that mortgage pricing patterns reflected differences in credit risk rather than discrimination.
Congress responded by expanding HMDA to include Congress responded by expanding HMDA to include rate spread information in 2002. At the information in 2002. At the
time, the rate spread was defined as the difference between the APR for a 30-year (fixed or time, the rate spread was defined as the difference between the APR for a 30-year (fixed or
adjustable rate) mortgage loan and the rate of a U.S. Treasury security of comparable maturity. adjustable rate) mortgage loan and the rate of a U.S. Treasury security of comparable maturity.
The mortgage interest rate was not chosen because it contains only the cost of the principal loan The mortgage interest rate was not chosen because it contains only the cost of the principal loan
amount expressed as a percentage. By contrast, the APR includes the cost of the principal loan amount expressed as a percentage. By contrast, the APR includes the cost of the principal loan
amount, insurance, and other upfront fees—all expressed as a percentage. The law requiring rate amount, insurance, and other upfront fees—all expressed as a percentage. The law requiring rate
spread information was implemented in 2004.spread information was implemented in 2004.48
45
The initial rate spread calculations, however, The initial rate spread calculations, however, containedwere found to have some measurement some measurement concernsissues. First, . First,
excessive higher-priced lendingexcessive higher-priced lending arguably may have been undercounted due to mismatched term may have been undercounted due to mismatched term
durations. As previously discussed, the 10-year Treasury securities better tracks the durations of durations. As previously discussed, the 10-year Treasury securities better tracks the durations of
30-year mortgages due to borrower prepayment behavior. By relying on 30-year Treasury rates, 30-year mortgages due to borrower prepayment behavior. By relying on 30-year Treasury rates,
which are typically higher than the 10-year Treasury rates, pre-2008 rate spread calculations may
43 Reference to fair lending laws and regulations typically encompasses enforcement of the Fair Housing Act, which is
Title VIII, Section 800, of the Civil Rights Act of 1968 (P.L. 90-284, 82 Stat. 73, 81-89). For more information on fair
lending examination procedures as well as definitions of discrimination types, see Office of the Comptroller of the
Currency, “Comptroller’s Handbook,” http://www.occ.treas.gov/handbook/fairlep.pdf.
44 See CRS Report R43661, The Effectiveness of the Community Reinvestment Act, by Darryl E. Getter.
45 See FDIC, “Frequently Asked Questions About the New HMDA Data,” March 31, 2005, http://www.fdic.gov/news/
news/press/2005/pr3005a.html.
46 See CRS Report R44125, Consumer Credit Reporting, Credit Bureaus, Credit Scoring, and Related Policy Issues, by
Cheryl R. Cooper and Darryl E. Getter.
47 See Board of Governors of the Federal Reserve System, Subprime Lending, Predatory Lending, remarks by
Governor Edward M. Gramlich, December 6, 2000, https://www.federalreserve.gov/boarddocs/speeches/2000/
20001206.htm.
48 P.L. 107-155, 116 Stat 81.
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which are typically higher than the 10-year Treasury rates, pre-2008 rate spread calculations may have been artificially low, resulting in a higher incidence of underreporting. Second, the initial have been artificially low, resulting in a higher incidence of underreporting. Second, the initial
rate spreads were highly sensitive to Treasury yield curve movements. For example, short-term rate spreads were highly sensitive to Treasury yield curve movements. For example, short-term
rates tend to rise higher than long-term rates following a sudden demand for cash by financial rates tend to rise higher than long-term rates following a sudden demand for cash by financial
institutions or deteriorating macroeconomic conditions. Over the first half of 2008, declines in the institutions or deteriorating macroeconomic conditions. Over the first half of 2008, declines in the
30-year Treasury rates led to wider rate spreads and greater HMDA reporting. The reported rate 30-year Treasury rates led to wider rate spreads and greater HMDA reporting. The reported rate
spreads, however, reflected yield curve rotations rather than a greater incidence of high-cost spreads, however, reflected yield curve rotations rather than a greater incidence of high-cost
mortgage pricing.mortgage pricing.
In October 2008, the Federal Reserve amended Regulation C to change the rate spread definition In October 2008, the Federal Reserve amended Regulation C to change the rate spread definition
to reduce the sensitivity of the rate spreads to yield curve movements, thus enhancing the to reduce the sensitivity of the rate spreads to yield curve movements, thus enhancing the
reliability of the collected data.reliability of the collected data.4946 The weekly Primary Mortgage Market Survey, conducted by The weekly Primary Mortgage Market Survey, conducted by
Freddie Mac, surveys lenders on the mortgage coupon and total charges at settlement for their Freddie Mac, surveys lenders on the mortgage coupon and total charges at settlement for their
most common mortgage products (e.g., 30-year fixed rate, 15-year fixed rate, certain most common mortgage products (e.g., 30-year fixed rate, 15-year fixed rate, certainARM
adjustable rate mortgage products) and reports the average of these loan terms, known as the average prime offer rates products) and reports the average of these loan terms, known as the average prime offer rates
(APORs).(APORs).5047 These APORs replaced the use of Treasury rates to calculate HMDA rate spreads. In These APORs replaced the use of Treasury rates to calculate HMDA rate spreads. In
other words, HMDA rate spreads are defined as the difference between the APR and the APOR. other words, HMDA rate spreads are defined as the difference between the APR and the APOR.
The reporting thresholds were also revised. For first mortgage loans, reporting is triggered when The reporting thresholds were also revised. For first mortgage loans, reporting is triggered when
the rate spread equals or is greater than 1.5 percentage points. For second mortgage loans, the the rate spread equals or is greater than 1.5 percentage points. For second mortgage loans, the
reporting threshold equals or is greater than 3.5 percentage points. The APORs, comprised of reporting threshold equals or is greater than 3.5 percentage points. The APORs, comprised of
mortgage coupons that use the 10-year Treasury as the base rate, follow mortgage market activity mortgage coupons that use the 10-year Treasury as the base rate, follow mortgage market activity
more closely than more closely than does the 30-year Treasury rate. Going forward, the reported rate spreads would the 30-year Treasury rate. Going forward, the reported rate spreads would
contain less variability such that any observed deviations would likely be more reliable indicators contain less variability such that any observed deviations would likely be more reliable indicators
of mortgage pricing irregularities.of mortgage pricing irregularities.
HMDA Reporting Requirements and Recent Modifications
Covered institutions—or those subject to HMDA reporting requirements—include depositories Covered institutions—or those subject to HMDA reporting requirements—include depositories
(i.e., banks and credit unions) and nondepository financial institutions.(i.e., banks and credit unions) and nondepository financial institutions.5148 A depository financial A depository financial
institution is subject to HMDA reporting if it exceeds an asset-size threshold published annually institution is subject to HMDA reporting if it exceeds an asset-size threshold published annually
in the in the Federal Register, has a home or branch office located in a metropolitan statistical area, has , has a home or branch office located in a metropolitan statistical area, has
originated at least one home purchase or refinance home loan, is federally insured or federally originated at least one home purchase or refinance home loan, is federally insured or federally
regulated, and meets the loan-volume thresholds discussed in the next paragraph. A banking regulated, and meets the loan-volume thresholds discussed in the next paragraph. A banking
institution must also have received a positive rating from its most recent Community institution must also have received a positive rating from its most recent Community
Reinvestment Act examination to be eligible for HMDA partial exemptions. A nondepository Reinvestment Act examination to be eligible for HMDA partial exemptions. A nondepository
financial institution is subject to HMDA reporting if it financial institution is subject to HMDA reporting if itsatisfies the following requirements: It has
has a home or branch office located in a metropolitan statistical area at which the institution accepts a home or branch office located in a metropolitan statistical area at which the institution accepts
applications from the public for covered mortgages, and it meets the loan-volume thresholds applications from the public for covered mortgages, and it meets the loan-volume thresholds
modified by the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act modified by the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA, P.L. 115-174(EGRRCPA, P.L. 115-174).).
Prior to EGRRCPA, the Dodd-Frank Act expanded HMDA reporting requirements, specifically Prior to EGRRCPA, the Dodd-Frank Act expanded HMDA reporting requirements, specifically
mandating the CFPB to include additional information about applicants (e.g., credit scores, age, mandating the CFPB to include additional information about applicants (e.g., credit scores, age,
debt-to-income ratios); additional information about the loan features (e.g., introductory rate debt-to-income ratios); additional information about the loan features (e.g., introductory rate
49 See Board of Governors of the Federal Reserve System, “Home Mortgage Disclosure,” 73 Federal Register 63329-
63338, October 24, 2008.
50 See Freddie Mac, “Mortgage Rates,” http://www.freddiemac.com/pmms/; and Freddie Mac, “Definitions,”
http://www.freddiemac.com/pmms/weightings/weightings_series_011.html.
51 See FDIC, Chapter V-9.1 Home Mortgage Disclosure Act, Consumer Compliance Examination Manual, December
2020, https://www.fdic.gov/resources/supervision-and-examinations/consumer-compliance-examination-manual/
documents/5/v-9-1.pdf.
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period, non-amortizing features); additional information about manufactured and multifamily period, non-amortizing features); additional information about manufactured and multifamily
housing; and other information.housing; and other information.5249 Credit history information, for example, can help detect Credit history information, for example, can help detect
whether any observed pricing differentials reflect differences in borrowerswhether any observed pricing differentials reflect differences in borrowers’' financial risks or financial risks or
discrimination, thus capturing more information about influences on lending decisions. However, discrimination, thus capturing more information about influences on lending decisions. However,
the costs associated with the collection and transmission of large amounts of digital data are the costs associated with the collection and transmission of large amounts of digital data are
lower per transaction for firms with large volumes and higher for those with lower volumes of lower per transaction for firms with large volumes and higher for those with lower volumes of
mortgage transactions.mortgage transactions.5350 Lenders, therefore, prior to implementation of the Dodd-Frank Act Lenders, therefore, prior to implementation of the Dodd-Frank Act
reporting requirements, had not been required to report numerous variables used to evaluate reporting requirements, had not been required to report numerous variables used to evaluate
applicants given that (1) federal regulatory agencies could obtain loan data from financial applicants given that (1) federal regulatory agencies could obtain loan data from financial
institutions they wish to examine more closelyinstitutions they wish to examine more closely, and (2) the HMDA data are released to the public, and (2) the HMDA data are released to the public,
which could compromise the privacy of individuals holding reported loans. For this reason, the which could compromise the privacy of individuals holding reported loans. For this reason, the
public data are currently modified to protect applicant and borrower privacy.public data are currently modified to protect applicant and borrower privacy.54
51
In response, EGRRCPA modified the reporting thresholds to reduce the compliance costs for In response, EGRRCPA modified the reporting thresholds to reduce the compliance costs for
entities with lower origination volumes. On April 16, 2020, the CFPB issued a final rule entities with lower origination volumes. On April 16, 2020, the CFPB issued a final rule
implementing these loan-volume thresholds for reporting open- and closed-implementing these loan-volume thresholds for reporting open- and closed-endedended loans via loans via
Regulation C.55 Open-end credit is generally defined as credit in which the creditor reasonably
contemplates repeated transactions, a finance charge is imposed on the outstanding balance, and
the amount of credit is replenished to the extent the outstanding balance is repaid; closed-end
credit includes all credit that does not meet the definition of open-end credit.56 A home equity line
of credit is an example of an open-end credit product, which allows borrowers the flexibility to
use some or all of their credit limit as well as to repay some or all of the outstanding balance over
the maturity term.57 By contrast, a traditional mortgage is an example of a closed-end credit
product with pre-determined principal and interest amounts that must be repaid in regular
intervals and in full by the maturity date.Regulation C.52 The previous threshold for the reporting of closed-end The previous threshold for the reporting of closed-end
mortgages, which was set at 25 loans over two calendar years, has been increased to 100 loans mortgages, which was set at 25 loans over two calendar years, has been increased to 100 loans
over two calendar years. For open-end lines of credit, the permanent threshold for reporting data over two calendar years. For open-end lines of credit, the permanent threshold for reporting data
is set at 200 effective January 1, 2022 (following expiration of the temporary higher threshold of is set at 200 effective January 1, 2022 (following expiration of the temporary higher threshold of
500 open-end lines of credit that was increased from 100 in 2018).500 open-end lines of credit that was increased from 100 in 2018).
After determining eligibility
If eligible to report, a financial institution must to report, a financial institution must then determine which reporting determine which reporting
requirements are applicable.requirements are applicable.5853 Specifically, the HMDA data contain 48 data points (comprised of Specifically, the HMDA data contain 48 data points (comprised of
110 fields); 26 of these data points may qualify for partial exemptions for certain depository
52 See CFPB, “Home Mortgage Disclosure (Regulation C),” 80 Federal Register 66128-66340, October 28, 2015.
53 See CRS In Focus IF11742, Too Small to Collect Big Data: Financial Inclusion Implications, by Darryl E. Getter.
54 See CFPB, “CFPB Finalizes Rule to Improve Information About Access to Credit in the Mortgage Market,” October
15, 2015, https://www.consumerfinance.gov/about-us/newsroom/cfpb-finalizes-rule-to-improve-information-about-
access-to-credit-in-the-mortgage-market/; and CFPB, “Mortgage Data (HMDA): About HMDA,”
https://www.consumerfinance.gov/data-research/hmda/.
55 See CFPB, “Consumer Financial Protection Bureau Issues Final Rule Raising Data Reporting Thresholds Under the
Home Mortgage Disclosure Act,” April 16, 2020, at https://www.consumerfinance.gov/about-us/newsroom/cfpb-
issues-final-rule-raising-data-reporting-thresholds-under-hmda/; and CFPB, “Home Mortgage Disclosure Reporting
Requirements (HMDA),” at https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/
hmda-reporting-requirements/.
56 See Federal Reserve, “Rules on Home-Equity Credit under the Truth in Lending Act,” report to the Congress,
November 1996, https://www.federalreserve.gov/boarddocs/rptcongress/he_study.pdf.
57 The interest or finance charges are determined by the amount of the outstanding balance, similar to a credit card.
58 See Federal Financial Institutions Examination Council, A Guide to HMDA Reporting: Getting It Right! (For HMDA
Submissions Due March 1, 2021), January 9, 2020, https://www.ffiec.gov/hmda/pdf/2020guide.pdf.
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institutions under EGRRCPA.59 If a depository’110 fields); 26 of these data points may qualify for partial exemptions for certain depository institutions under EGRRCPA.54 If a depository's number of originations falls below the above-s number of originations falls below the above-
mentioned loan-volume thresholds, then it qualifies for the partial exemption (although it may mentioned loan-volume thresholds, then it qualifies for the partial exemption (although it may
still voluntarily report the eligible data). Some of the data eligible for a partial exemption include still voluntarily report the eligible data). Some of the data eligible for a partial exemption include
reasons for denial (if applicable), the borrowerreasons for denial (if applicable), the borrower’'s debt-to-income (DTI) ratio, credit score, interest s debt-to-income (DTI) ratio, credit score, interest
rate, rate spread, total points and fees, and origination charges, among other things. The rate, rate spread, total points and fees, and origination charges, among other things. The
remaining 22 data points do not qualify for a partial exemption and must be reported. Some of the remaining 22 data points do not qualify for a partial exemption and must be reported. Some of the
mandatory data include ethnicity, race, sex, age, income, state, county, census tract, and HOEPA mandatory data include ethnicity, race, sex, age, income, state, county, census tract, and HOEPA
status (high-cost loans discussed in the section below status (high-cost loans discussed in the section belowentitled “titled "The Home Ownership Equity and The Home Ownership Equity and
Protection ActProtection Act”"), among other things.), among other things.
Going forward, the partial exemptions Going forward, the partial exemptions willmay likely result in less mortgage data being reported. According result in less mortgage data being reported. According
to a May 2021 Government Accountability Office (GAO) report, the overall impact has been to a May 2021 Government Accountability Office (GAO) report, the overall impact has been
“"minimal,minimal,”" but the partial exemptions are likely to have the greatest impact on HMDA data but the partial exemptions are likely to have the greatest impact on HMDA data
collected from less densely populated areas (e.g., rural areas).collected from less densely populated areas (e.g., rural areas).6055 Consequently, the ability to Consequently, the ability to
monitor mortgage pricing in these localitiesmonitor mortgage pricing in these localities —as well as the progress made with respect to the as well as the progress made with respect to the
GSEs’Enterprises' duty-to-serve rural housing goals (established by the Housing and Economic Recovery Act duty-to-serve rural housing goals (established by the Housing and Economic Recovery Act
of 2008 [P.L. 110-289])of 2008 [P.L. 110-289]) —may become more challenging.may become more challenging.6156 The GAO report also noted that lenders The GAO report also noted that lenders
falling below the threshold for open-ended lines of credit are not required to report the relevant falling below the threshold for open-ended lines of credit are not required to report the relevant
data points that would confirm their eligibility for the partial exemption.data points that would confirm their eligibility for the partial exemption.6257 Amending the statute Amending the statute
would be necessary to enhance HMDA coverage for these circumstances.
Increasing the Costs to Offer High-Cost Mortgages
Enhanced disclosures is one approach toward achieving more competitive pricing of mortgage
credit. Although differences in borrowers’ financial risks and variation along with regional
differences in settlement costs does not allow for convergence to a single APR, greater
convergence to a tighter range of prices still allows borrowers and lenders to form more accurate
pricing expectations. Regulators, however, have greater data regarding creditworthy prime
borrowers with similar and more predictable prepayment and default rates. The APOR used to
determine HMDA rate spread eligibility is largely calculated using the mortgage terms offered to
prime borrowers.63 Consequently, advancement toward a more ideal LOOP outcome is more
likely to occur in the primary mortgage market consisting largely of prime borrowers.
For primary mortgage markets consisting largely of borrowers with weaker or non-existent credit
histories, increasing lenders’ costs to provide high-cost mortgage products may deter abusive
lending practices. This approach is conceptually analogous to applying a Pigouvian tax, which
59 See FDIC, Home Mortgage Disclosure Act, V-9.1, Supervision and Examinations: Consumer Compliance
Examination Manual, December 2020, https://www.fdic.gov/resources/supervision-and-examinations/consumer-
compliance-examination-manual/documents/5/v-9-1.pdf. Partial exemptions exist separately for closed-end mortgages
and open-end lines of credit, and both operate independently.
60 See GAO, Home Mortgage Disclosure Act: Reporting Exemptions Had a Minimal Impact on Data Availability, but
Additional Information Would Enhance Oversight, GAO-21-350, May 17, 2021, https://www.gao.gov/assets/gao-21-
350.pdf.
61 For more information on the duty-to-serve housing goals for the GSEs, see CRS Report R46746, Fannie Mae and
Freddie Mac: Recent Administrative Developments, by Darryl E. Getter.
62 See GAO, Home Mortgage Disclosure Act.
63 The GSEs purchase mortgages largely originated for prime borrowers. Since conservatorship, FHFA directed the
GSEs to create MBSs comprised of mortgages offered to borrowers with similar prepayment and default rates. For
more information, see CRS Report R46746, Fannie Mae and Freddie Mac: Recent Administrative Developments, by
Darryl E. Getter.
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raises the cost of a practice that arguably would be necessary to enhance HMDA coverage for these circumstances.
Discouraging High-Cost Mortgage Offerings
practice.practice.6464 This section discusses regulatory and legislative tools that impose This section discusses regulatory and legislative tools that impose enhanced damages
(higher costs, various remedial actions (discussed in the sections below) discussed in the sections below) toon lenders when lenders when offeringthey offer high-cost and high-cost and
unaffordableless affordable mortgages. mortgages.
The Home Ownership Equity and Protection Act
Although additional compensation for lenders to take elevated credit risks may be justified, the Although additional compensation for lenders to take elevated credit risks may be justified, the
charges arguably may not be proportional to and possibly exceed the additional credit risks posed charges arguably may not be proportional to and possibly exceed the additional credit risks posed
by some borrowers. Determining the appropriate amount of additional basis points lenders should by some borrowers. Determining the appropriate amount of additional basis points lenders should
charge for various gradations of elevated default risk is complicated, because fewer defaults are charge for various gradations of elevated default risk is complicated, because fewer defaults are
observed when house prices are stable or rising.observed when house prices are stable or rising.6565 Likewise, determining whether excessive Likewise, determining whether excessive
charges are proportional to elevated default risks or linked to unobservable factors such as charges are proportional to elevated default risks or linked to unobservable factors such as
inadvertent (disparate treatment) or overt discrimination—even with the use of statistical inadvertent (disparate treatment) or overt discrimination—even with the use of statistical
analysis—may be challenging for regulators when conducting fair lending examinations.analysis—may be challenging for regulators when conducting fair lending examinations.6666
HOEPA amends TILA by imposing additional disclosure requirements on lenders when HOEPA amends TILA by imposing additional disclosure requirements on lenders when
originating high-cost refinance and other non-purchase mortgages secured by their principal originating high-cost refinance and other non-purchase mortgages secured by their principal
residences.residences.6767 Failure to comply with all HOEPA requirements triggers enhanced remedies (e.g., Failure to comply with all HOEPA requirements triggers enhanced remedies (e.g.,
monetary damages) borne by the lenders.monetary damages) borne by the lenders.6868 Congress initially granted implementation and Congress initially granted implementation and
64 In this context, societal costs may be in the form of rising housing costs burdens, which can discourage
homeownership or increase the likelihood of mortgage defaults and foreclosures—both outcomes possibly having
spillover effects on various housing market values. For discussions regarding the strengths and weaknesses of a
Pigouvian tax, see William J. Baumol, “On Taxation and the Control of Externalities,” American Economic Review,
vol. 62, no. 3 (June 1972), pp. 307-322; Earl A. Thompson and Ronald Batchelder, “On Taxation and the Control of
Externalities: Comment,” American Economic Review, vol. 64, no. 3 (June 1974), pp. 467-471; and Dennis W. Carlton
and Glenn C. Loury, “The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities,” Quarterly
Journal of Economics, vol. 95, no. 3 (November 1980), pp. 559-566.
65 Developing algorithms to price various gradations of higher-risk borrowers (i.e., ordering by descending credit
scores) is challenging because default incentives are observed primarily when home values fall far below the
outstanding mortgage balance amounts (or other unanticipated sudden adverse events occur). See Richard K. Green and
Susan M. Wachter, The Housing Finance Revolution, Federal Reserve Bank of Kansas City, August 2007, pp. 21-67,
https://www.kansascityfed.org/documents/3221/pdf-Green_Wachter_0415.pdf; William N. Goetzmann, Liang Peng,
and Jacqueline Yen, The Subprime Crisis and House Price Appreciation, National Bureau of Economic Research,
Working Paper no. 15334, September 2009, https://www.nber.org/system/files/working_papers/w15334/w15334.pdf;
and Amy Crews Cutts and Robert A. Van Order, “On the Economics of Subprime Lending,” Journal of Real Estate
Finance and Economics, vol. 30, no. 2 (2005), pp. 167-196. In addition, the Federal Reserve issued final rules
prohibiting collateral-dependent lending—the practice of lending on current or expected future value of the housing
assets, relying upon proceeds from home sales to repay any defaulted mortgages—rather than the incomes and savings
of higher-risk borrowers. See Board of Governors of the Federal Reserve System, “Board Issues Final Rule Amending
Home Mortgage Provisions of Regulation Z (Truth in Lending),” press release, June 14, 2008,
http://www.federalreserve.gov/newsevents/press/bcreg/20080714a.htm.
66 See Konstantinos Tzioumis, “Detecting Discrimination: A Dynamic Perspective,” Journal of the Royal Statistical
Society Series A, vol. 179, no. 1 (January 2016), pp. 133-152; and Anthony M. Yeazer, A Review of Statistical
Problems in the Measurement of Mortgage Market Discrimination and Credit Risk, Research Institute for Housing
America, September 2010.
67 For more detailed information about HOEPA, see CFPB, “High-Cost Mortgage and Homeownership Counseling
Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real
Estate Settlement Procedures Act (Regulation X),” https://www.consumerfinance.gov/rules-policy/final-rules/high-
cost-mortgage-and-homeownership-counseling-amendments-truth-lending-act-regulation-z-and-homeownership-
counseling-amendments-real-estate-settlement-procedures-act-regulation-x/.
68 For more information on enhanced damages for HOEPA violations, see letter from Jeffrey P. Bloch, Senior
Regulatory Counsel, Consumer Bankers Association, to Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, July 22, 2011, https://www.federalreserve.gov/SECRS/2011/August/20110811/R-1417/R-
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rulemaking authority of HOEPA to the Federal Reserve. In 2002, the Federal Reserve made the rulemaking authority of HOEPA to the Federal Reserve. In 2002, the Federal Reserve made the
following revisions to expand HOEPA coveragefollowing revisions to expand HOEPA coverage:69
69:A loan would be subject to HOEPA reporting requirements if either the APR A loan would be subject to HOEPA reporting requirements if either the APR
exceeds the rate of a comparable Treasury security by more than 8 percentage exceeds the rate of a comparable Treasury security by more than 8 percentage
points on a first mortgage or 10 percentage points on a second mortgage or if the points on a first mortgage or 10 percentage points on a second mortgage or if the
consumer pays total points and fees exceeding the consumer pays total points and fees exceeding the greater of 8% or a dollar of 8% or a dollar
amount that is adjusted annually based upon the Consumer Price Index. (This amount that is adjusted annually based upon the Consumer Price Index. (This
definition was modified in 2010 as discussed below.)definition was modified in 2010 as discussed below.)
If a loan satisfies certain criteria to be covered by HOEPA, a borrower must be If a loan satisfies certain criteria to be covered by HOEPA, a borrower must be
provided with disclosures three days before the loan is closed in addition to the provided with disclosures three days before the loan is closed in addition to the
three-day right of rescission generally required by TILA, which means a total of three-day right of rescission generally required by TILA, which means a total of
six days to decide whether or not to enter into the transaction.six days to decide whether or not to enter into the transaction.
Revisions to Regulation C required lenders to report HOEPA loans in HMDA, Revisions to Regulation C required lenders to report HOEPA loans in HMDA,
and they must also identify such loans as being subject to HOEPA and they must also identify such loans as being subject to HOEPA
requirements.requirements.7070 HOEPA, however, is implemented via Regulation Z (12 C.F.R. HOEPA, however, is implemented via Regulation Z (12 C.F.R.
Part 226, Sections 31, 32, and 34).Part 226, Sections 31, 32, and 34).
In 2008, the Federal Reserve amended Regulation Z to apply HOEPA rules to all mortgage In 2008, the Federal Reserve amended Regulation Z to apply HOEPA rules to all mortgage
lenders—including non-bank entities that do not have primary prudential regulators.lenders—including non-bank entities that do not have primary prudential regulators.7171 The The
amended rule also prohibited lenders from making loans based upon the amended rule also prohibited lenders from making loans based upon thehomehomes' value without value without
regard for the regard for theborrower’sborrowers' ability to repay the loan from income and assets. It also required ability to repay the loan from income and assets. It also required
verification of income and assets for determining repayment ability. Further, higher-cost loans verification of income and assets for determining repayment ability. Further, higher-cost loans
may not have prepayment penalties lasting for more than two years, and prepayment penalties are may not have prepayment penalties lasting for more than two years, and prepayment penalties are
not allowed for loans in which the monthly payment can change during the initial four years. not allowed for loans in which the monthly payment can change during the initial four years.
Finally, escrow accounts for property taxes and homeownersFinally, escrow accounts for property taxes and homeowners’' insurance must be established for insurance must be established for
all first-lien mortgages. These additional protections apply to all higher-priced loansall first-lien mortgages. These additional protections apply to all higher-priced loans; —that is, first-that is, first-
lien mortgages with APRs 1.5% above the applicable APOR or subordinate-lien mortgages with lien mortgages with APRs 1.5% above the applicable APOR or subordinate-lien mortgages with
APRs 3.5% above the applicable APOR.APRs 3.5% above the applicable APOR.
The Dodd-Frank Act strengthened consumer protections for high-cost mortgages by revising The Dodd-Frank Act strengthened consumer protections for high-cost mortgages by revising
HOEPA’HOEPA's coverage tests and providing further restrictions on loan terms, which were s coverage tests and providing further restrictions on loan terms, which were
implemented by the CFPB.implemented by the CFPB.7272 When the rule became effective in 2014, some of the requirements When the rule became effective in 2014, some of the requirements
and restrictions included the following:
1417_072211_84144_535349935589_1.pdf; and CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under
the Truth in Lending Act (Regulation Z),” 78 Federal Register 6408-6620, January 30, 2013. Enhanced damages
include actual damages to the borrower, the finance charge (interest basis points and fees) multiplied by two, statutory
damages up to $4,000, court costs, and attorney’s fees. See Laurie Goodman et al., The Coming Crisis in Credit
Availability, Amherst Mortgage Insight, May 30, 2012, pp. 1-14, https://www.sec.gov/comments/s7-14-11/s71411-
363.pdf.
69 See Board of Governors of the Federal Reserve System, “Truth in Lending,” 66 Federal Register 65604-65622,
December 20, 2001.
70 See Federal Reserve, press release, June 21, 2002, https://www.federalreserve.gov/boarddocs/press/bcreg/2002/
20020621/default.htm.
71 See Board of Governors of the Federal Reserve System, “Board Issues Final Rule Amending Home Mortgage
Provisions of Regulation Z (Truth in Lending).”
72 See CFPB, “Summary of the Final Rule to Strengthen Consumer Protections for High-Cost Mortgages,” January 10,
2013, https://files.consumerfinance.gov/f/201301_cfpb_high-cost-mortgage-rule_summary.pdf; and CFPB, “High-Cost
Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and
Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X),” 78 Federal
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and restrictions included the following:A loan is subject to HOEPA reporting requirements if (1) the APR exceeds the A loan is subject to HOEPA reporting requirements if (1) the APR exceeds the
applicable APOR by more than 6.5% on a first mortgage or 8.5% on a second applicable APOR by more than 6.5% on a first mortgage or 8.5% on a second
mortgage, (2) the consumer pays total points and fees exceeding 5% of the total mortgage, (2) the consumer pays total points and fees exceeding 5% of the total
loan amount, or (3) the consumer pays total points and fees loan amount, or (3) the consumer pays total points and feesexceedingthat exceed the lesser the lesser
of 8% or $1,000 for loans of 8% or $1,000 for loans that are less than $20,000 (with the dollar amounts adjusted less than $20,000 (with the dollar amounts adjusted
annually for inflation).annually for inflation).73
73
A loan is subject to HOEPA reporting requirements if it has a prepayment penalty A loan is subject to HOEPA reporting requirements if it has a prepayment penalty
extending beyond 36 months for closing or the prepayment penalty exceeds 2% extending beyond 36 months for closing or the prepayment penalty exceeds 2%
of the amount prepaid.of the amount prepaid.
Balloon payments are generally banned except under certain circumstances.Balloon payments are generally banned except under certain circumstances.
The calculation of points and fees that apply to high-cost loans was revised to The calculation of points and fees that apply to high-cost loans was revised to
include most compensation paid to a loan originator (i.e., origination, include most compensation paid to a loan originator (i.e., origination,
underwriting, and brokerunderwriting, and broker’'s fees); prepayment penalties; and the amount of the s fees); prepayment penalties; and the amount of the
upfront mortgage insurance premium in excess of the Federal Housing upfront mortgage insurance premium in excess of the Federal Housing
Administration (FHA) upfront premium.Administration (FHA) upfront premium.
Before making a high-cost mortgage, creditors are required to confirm that a Before making a high-cost mortgage, creditors are required to confirm that a
borrower received counseling on the advisability of the mortgage by a federally borrower received counseling on the advisability of the mortgage by a federally
certified or approved homeownership counselor.certified or approved homeownership counselor.74
74Since passage of HOEPA, mortgages that would be covered by the law have made up a small Since passage of HOEPA, mortgages that would be covered by the law have made up a small
share of the mortgage market and are concentrated among very few lenders.share of the mortgage market and are concentrated among very few lenders.7575 HOEPA lending HOEPA lending
declined markedly after new regulations were implemented to amend the definition of declined markedly after new regulations were implemented to amend the definition of high-cost
mortgage to cover more types of loans. to cover more types of loans.7676 Stated differently, greater disclosure requirements and Stated differently, greater disclosure requirements and
legal risks significantly raise lenderslegal risks significantly raise lenders’' potential costs, thereby reducing the likelihood of mortgage potential costs, thereby reducing the likelihood of mortgage
originations with features that could exacerbate borrowersoriginations with features that could exacerbate borrowers’' housing cost burdens. housing cost burdens.
The Ability-to-Repay Requirement and Qualified Mortgage Rule
On January 10, 2013, the CFPB released a final rule implementing the On January 10, 2013, the CFPB released a final rule implementing theability-to-repay (ATR)
ATR requirement of the Dodd-Frank Act, which became effective on January 10, 2014.77 The Dodd-Frank Act requires lenders to verify borrowers'requirement of the Dodd-Frank Act, which became effective on January 10, 2014.77 The Dodd-
Register 6856-6975, January 31, 2013.
73 For 2021, the HOEPA annual threshold for high-cost mortgages is $22,052. See CFPB, “Truth in Lending
(Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages),” 85 Federal Register
50944-50950, August 19, 2021.
74 HUD certifies housing counseling agencies that meet certain requirements. For more information, see HUD, “How to
Become a HUD-Approved Housing Counseling Agency,” https://www.hudexchange.info/programs/housing-
counseling/agency-application/.
75 In 2005, 10 lenders accounted for 70% of all HOEPA reported loan originations, and 730 institutions reported
making only one or two HOEPA loans. For more information, see Robert B. Avery, Kenneth P. Brevoort, and Glenn B.
Canner, “Higher-Priced Home Lending and the 2005 HMDA Data,” Federal Reserve Bulletin, September 8, 2006,
https://www.federalreserve.gov/pubs/bulletin/2006/hmda/bull06hmda.pdf.
76 For more information, see Rachel Leary, The Expanded Scope of High-Cost Mortgages Under the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Federal Reserve Bank of Philadelphia,
https://consumercomplianceoutlook.org/2015/first-quarter/expanded-scope-of-high-cost-mortgages-under-dodd-frank-
wall-street-reform-consumer-protection-act-2/; and Neil Bhutta, Steven Laufer, and Daniel R. Ringo, “Residential
Mortgage Lending in 2016: Evidence from the Home Mortgage Disclosure Act Data,” Federal Reserve Bulletin,
November 2017, https://www.federalreserve.gov/publications/files/2016_HMDA.pdf.
77 See CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z),” 78
Federal Register 6408-6620, January 30, 2013.
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Frank Act requires lenders to verify borrowers’ ATR with documentation. As in the case of ATR with documentation. As in the case of
HOEPA violations, the Dodd-Frank Act provides enhanced damages for violation of the ATR HOEPA violations, the Dodd-Frank Act provides enhanced damages for violation of the ATR
requirement.requirement.7878 This section discusses how mortgage pricing is used to determine compliance with This section discusses how mortgage pricing is used to determine compliance with
the ATR rule.the ATR rule.
The ATR requires a lender to make a reasonable good faith determination of the consumerThe ATR requires a lender to make a reasonable good faith determination of the consumer’s
's ability to repay the loan according to its terms. Before making a residential mortgage loanability to repay the loan according to its terms. Before making a residential mortgage loan to a
consumer, a lender must consider and verify with documentation eight underwriting criteria for , a lender must consider and verify with documentation eight underwriting criteria for
the borrower: (1) current or reasonably expected income or assets; (2) current employment status; the borrower: (1) current or reasonably expected income or assets; (2) current employment status;
(3) monthly payments of principal and interest on the primary mortgage lien; (4) monthly (3) monthly payments of principal and interest on the primary mortgage lien; (4) monthly
payment on any junior mortgage lien; (5) monthly payment for mortgage-related obligations (e.g., payment on any junior mortgage lien; (5) monthly payment for mortgage-related obligations (e.g.,
property taxes, homeowner association fees); (6) any additional debt obligations (e.g., property taxes, homeowner association fees); (6) any additional debt obligations (e.g.,
automobile, credit card, education); (7) monthly DTI ratio or residual income; and (8) credit automobile, credit card, education); (7) monthly DTI ratio or residual income; and (8) credit
history.history.
The 2014 final rule provided multiple ways for a loan originator to comply with the ATR The 2014 final rule provided multiple ways for a loan originator to comply with the ATR
requirements,requirements,7979 one of which is by originating a qualified mortgage (QM). A general QM must one of which is by originating a qualified mortgage (QM). A general QM must
meet certain product feature and underwriting requirements. The mortgage must fully amortize, meet certain product feature and underwriting requirements. The mortgage must fully amortize,
meaning that the borrowermeaning that the borrower’'s payments must be applied toward paying down a portion of the s payments must be applied toward paying down a portion of the
principal loan balance over time. A general QM cannot have a balloon or large principal payment principal loan balance over time. A general QM cannot have a balloon or large principal payment
due at the end of the loandue at the end of the loan, nor can it have a loan term that exceeds 30 years. Furthermore, a general QM loan cannot negatively amortize, meaning . Furthermore, a general QM loan cannot negatively amortize, meaning
that its principal loan balance cannot increase over time.that its principal loan balance cannot increase over time.
Consequently, the QM rule imposes on lenders additional legal risks that may translate into Consequently, the QM rule imposes on lenders additional legal risks that may translate into
higher costs for improper underwritinghigher costs for improper underwriting, which could that may adversely affect borrowers adversely affect borrowers’' financial financial
situations. Specifically, a general QM receives a situations. Specifically, a general QM receives a rebuttable presumption of compliance with ATR. of compliance with ATR.
In other words, a borrower may still In other words, a borrower may stillbe able to prevail in court if prevail in court if theany information information, which had been
presented to presented tothea lender during the mortgage application and origination process lender during the mortgage application and origination process, would have would have
indicated that the borrowerindicated that the borrower’'s residual income was insufficient to meet living expenses after s residual income was insufficient to meet living expenses after
paying the mortgage and other debts. If, however, additional underwriting requirements paying the mortgage and other debts. If, however, additional underwriting requirements
(described below) are met, a lender originating a general QM can receive (described below) are met, a lender originating a general QM can receive safe harbor legal legal
protection, meaning that protection, meaning thata borrower would not be able to assert that thethe loan originator (and any originator (and any
subsequent secondary-market purchaser) subsequent secondary-market purchaser)failed todid comply with comply with any of the required underwriting the required underwriting
criteria.criteria.
The Initial 43% Debt-to-Income Requirement for QM Status
Limiting the borrowerLimiting the borrower’'s DTI ratio to 43% had initially been one of the additional underwriting s DTI ratio to 43% had initially been one of the additional underwriting
requirements for a loan to receive QM status under the 2014 final rule.requirements for a loan to receive QM status under the 2014 final rule.8080 Mortgages with DTIs Mortgages with DTIs
exceeding 43% would still qualify as QMs if they meet the eligibility requirements to be insured exceeding 43% would still qualify as QMs if they meet the eligibility requirements to be insured
or guaranteed by FHA, or guaranteed by FHA,U.S.the Department of Agriculture (USDA), or the Department of Veterans Affairs (VA) and Department of Agriculture (USDA), or Veterans’ Administration and
78 See CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z).”
79 For more detailed comparisons concerning how lenders can comply with the ATR requirements, see CFPB, “General
Comparison of Ability-to-Repay Requirements with Qualified Mortgages,” https://files.consumerfinance.gov/f/
documents/201603_cfpb_atr-and-qm-comparison-chart.pdf.
80 The QM rule may be considered a macroprudential policy tool that may reduce a financial system’s vulnerability to
payment disruptions and systemic panics. Lender-of-last resort interventions, collateral requirements, and public credit
guarantees (e.g., federal mortgage insurance) are examples of macroprudential tools available for governments to
promote financial stability. See Tobias Adrian et al., Macroprudential Policy: A Case Study from a Tabletop Exercise,
Federal Reserve Bank of New York, February 1, 2017, https://www.newyorkfed.org/medialibrary/media/research/epr/
2016/epr_2016-adrian-macroprudential-policy.pdf.
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meet permanent QM standards established by each of those agencies. These agencies adopted meet permanent QM standards established by each of those agencies. These agencies adopted
their own QM definitions, which excluded product features they considered would impede their own QM definitions, which excluded product features they considered would impede
repayment from borrowers they predominantly serve—but they did not limit DTIs to 43%.repayment from borrowers they predominantly serve—but they did not limit DTIs to 43%.81
81 Mortgages with DTIs exceeding 43% could still qualify under the Mortgages with DTIs exceeding 43% could still qualify under theTemporary GSE QM (or QM
QM patch) category. In addition, the CFPB category applicable to the Enterprises.82 The CFPB also provided originators with Appendix Q, provided originators with Appendix Q, which was a list of a list of
required guidelines to verify borrowersrequired guidelines to verify borrowers’' incomes and debt obligations for mortgages with DTIs incomes and debt obligations for mortgages with DTIs
above 43% or ineligible for sale to the above 43% or ineligible for sale to theGSEsEnterprises or for federal mortgage insurance. or for federal mortgage insurance.
In a January 2019 assessment report of the ATR, the CFPB found that the DTI cap of 43% may In a January 2019 assessment report of the ATR, the CFPB found that the DTI cap of 43% may
have restricted credit access.have restricted credit access.82 For example, borrowers83 Borrowers with mortgages who had demonstrated the with mortgages who had demonstrated the
ability to repay their loans—but with DTIs exceeding 43%—experienced reductions in credit ability to repay their loans—but with DTIs exceeding 43%—experienced reductions in credit
access when attempting to refinance, suggesting a lender preference for safe harbor legal access when attempting to refinance, suggesting a lender preference for safe harbor legal
protection. Many originators, also reporting Appendix Q to be unclear and complex in practice, protection. Many originators, also reporting Appendix Q to be unclear and complex in practice,
had limited themselves to making QM loans only to avoid exposure to potential liability and had limited themselves to making QM loans only to avoid exposure to potential liability and
litigation risks.litigation risks.8384 Consequently, the CFPB found that borrowers who Consequently, the CFPB found that borrowers who applied for loans eligible for
purchase or guarantee by one of the GSEs or federal agencies were less affected by the QM rule.
Therefore, the Temporary GSE QM patch, along with the QM status received when mortgages are
federally guaranteed, grew more important for accessing credit.84 In other words, a policy tool
designed to discourage the production of potentially harmful products may still be regressive,
meaning in this case that low- and moderate-income borrowers may bear more of the costs in the
form of reduced credit access because lenders receive greater legal protection when originating
loans to higher-income borrowers.85
Revisiting and Expansion of the QM Definitions
The CFPB has since amended the QM definitions to possibly achieve a better balance between
ensuring consumers’ ATR and access to affordable mortgage credit. Using pricing as a proxy for
81 See HUD, “Qualified Mortgage Definition for HUD Insured and Guaranteed Single Family Mortgages,” 78 Federal
Register 75215-75238, December 13, 2013; U.S. Department of Veterans Affairs, “Loan Guaranty: Ability-to-Repay
Standards and Qualified Mortgage Definition Under the Truth in Lending Act,” 79 Federal Register 26620-26628,
May 9, 2014; and USDA, Rural Housing Service, “Single Family Housing Guaranteed Loan Program,” 81 Federal
Register 26461-26465, May 3, 2016.
82 See CFPB, Ability-to-Repay and Qualified Mortgage Rule Assessment Report, January 2019,
https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf.
83 The few originators that offer non-QM loans charge higher rates to offset potential legal and compliance risks, even
if the underlying credit risk is relatively low. As a result, some categories of creditworthy borrowers that should qualify
for QMs have trouble accessing safe, sustainable, and affordable mortgage credit. See Karan Kaul and Laurie
Goodman, What, If Anything, Should Replace the QM GSE Patch?, Urban Institute, August 2018,
https://www.urban.org/sites/default/files/publication/98949/2018_10_30_qualified_mortgage_rule_finalizedv2_0.pdf;
and Mortgage Bankers Association, “ATR/QM Improvements,” https://www.mba.org/issues/residential-issues/atr/qm-
improvements.
84 Without the Temporary GSE QM in place, whether the GSEs would purchase non-QMs was uncertain. For example,
after passage of the Georgia Anti-Predatory Lending Act of 2002, the GSEs announced that they would no longer
purchase mortgages originated in Georgia to avoid the legal risk of assignee liability. For more information, see
Jennifer Ablan, “Georgia Law Sparks Mortgage ‘Crisis,’” Wall Street Journal, January 27, 2003, https://www.wsj.com/
articles/SB1043452328933437504; Office of the Comptroller of the Currency, “Preemption Determination and Order,”
68 Federal Register 46278, August 5, 2003; and Office of the Comptroller of the Currency, “Remarks by John D.
Hawke, Jr., Comptroller of the Currency Before the Federalist Society,” press release, July 24, 2003,
https://www.occ.treas.gov/news-issuances/speeches/2003/pub-speech-2003-57.pdf.
85 For a discussion on the regressivity of a Pigouvian tax, see Benjamin B. Lockwood and Dmitry Taubinsky,
Regressive Sin Taxes, NBER Working Paper no. 23085, March 2017, https://www.nber.org/system/files/
working_papers/w23085/w23085.pdf.
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affordability, the CFPB released a final rule in December 2020 with the following revisions to the
2014 final rule:86
All general QM loans must still meet certain underwriting and product feature
requirements as well as limits on points and fees. The 43% DTI ratio
requirement, however, was removed and replaced with requirements that are
based on the mortgage pricing, which reflects the credit quality of borrowers.
When a lender issues a general QM, it creates a presumption that the lender has
complied with its ATR responsibilities, reducing the lender’s legal exposure. The
level of protection afforded a lender is linked to the loan’s pricing. General QMs,
with rate spreads—previously defined as the difference between the APR and
APOR—that do not exceed 1.5 percentage points (or 3.5 percentage points or
more for subordinate-lien mortgages) qualify for safe harbor legal protection.87
These thresholds are the same as in the 2014 final rule.
For a rebuttable presumption general QM, the difference between APR and
APOR for first-lien mortgages may exceed 1.5 percentage points, but it is limited
to 2.25 percentage points under the revised final rule. Under a rebuttable
presumption, a borrower can argue that the lender violated the ATR rule if the
information presented to the lender during the loan application and origination
processes would have indicated that the borrower’s residual income was
insufficient to meet living expenses after paying the mortgage and other debts.
The 2020 final rule removed Appendix Q and granted safe harbor to creditors
using other verification standards specified by the CFPB.88
The 2020 final rule increased the loan amount thresholds that the APR could be
above the APOR for certain circumstances. For example, the thresholds for first-
lien loans with smaller balances and subordinate-liens, which tend to have higher
APRs, were increased to be eligible for QM status. A first-lien secured by a
manufactured home (as defined under HUD regulations that establish
construction and safety standards) may also be eligible for QM status.
The Temporary GSE QM granted QM status to mortgages eligible for purchase by the GSEs until
January 10, 2021, or when they would exit conservatorship, whichever would have occurred
earlier.89 On October 20, 2020, the sunset date for the Temporary GSE QM definition was
86 See CFPB, “Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): General QM Loan
Definition,” 85 Federal Register 86308-86400, December 29, 2020.
87 Consistent with the current rule, the CFPB proposes higher thresholds for loans with smaller loan amounts and for
subordinate-lien transactions, which typically have higher APRs. For more information on how the CFPB defines the
benchmark APOR, see, CFPB, “What Is a ‘Higher-Priced Mortgage Loan?,’” September 17, 2013,
https://www.consumerfinance.gov/ask-cfpb/what-is-a-higher-priced-mortgage-loan-en-1797/.
88 The verification standards include relevant provisions from Fannie Mae’s Single Family Selling Guide, Freddie
Mac’s Single-Family Seller/Servicer Guide, FHA’s Single Family Housing Policy Handbook, the Veterans’
Administration’s Lenders’ Handbook, and the Field Office Handbook for the Direct Single Family Housing Program
and Handbook for the Single Family Guaranteed Loan Program of the USDA.
89 See CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z),” 78
Federal Register 6049, January 30, 2013; Bing Bai, Laurie Goodman, and Ellen Seidman, Has the QM Rule Made It
Harder to Get a Mortgage?, Urban Institute, March 2016, obtained loans guaranteed by a federal agency or purchased by one of the Enterprises became important for accessing mortgage credit. Therefore, despite the intent to discourage offers of unaffordable mortgages, the CFPB report found the QM rule to be regressive: The cost of the rule was borne by some low- and moderate-income households in the form of reduced access to low-cost credit, yet lenders received greater legal protection when originating loans to higher-income borrowers.85
Revisiting and Expansion of the QM Definitions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
For simplicity, the discussion in this report focuses on the conventional 30-year fixed rate mortgage. However, some mortgage products are designed specifically for borrowers expected to prepay even before 10 years. For example, adjustable rate mortgages (ARMs) have coupons benchmarked to an index such as a constant maturity Treasury (one-year) rate, calculated using the weekly average yield of U.S. Treasury securities. An ARM coupon may change annually with a cap that restrict either the size of the interest rate change (up or down) in any given year or the minimum or maximum interest rate allowed over the life of the loan. Mortgages known as hybrid ARMs have fixed coupons for several years and then adjust periodically. Despite the risk of rising interest rates, borrowers who anticipate prepaying their ARMs may incur lower overall interest expense relative to what they would have paid with a traditional fixed rate mortgage over a similar short horizon. For more information, see HUD, "Adjustable Rate Mortgages (ARM)," https://www.hud.gov/program_offices/housing/sfh/ins/203armt; CFPB, "For an Adjustable-Rate Mortgage (ARM), What Are the Index and Margin, and How Do They Work?," April 3, 2024, https://www.consumerfinance.gov/ask-cfpb/for-an-adjustable-rate-mortgage-arm-what-are-the-index-and-margin-and-how-do-they-work-en-1949/; and U.S. Department of the Treasury, "Interest Rates—Frequently Asked Questions," https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics/interest-rates-frequently-asked-questions.
14.
See Joe Mattey, "Mortgage Interest Rates, Valuation, and Prepayment Risk," Federal Reserve Bank of San Francisco, October 9, 1998, https://www.frbsf.org/economic-research/publications/economic-letter/1998/october/mortgage-interest-rates-valuation-and-prepayment-risk/. The difference between the 30-year and 10-year Treasury rates is an example of an amount that can be added to the 10-year Treasury as compensation to a lender for prepayment risk.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
TILA and RESPA were initially implemented by the Federal Reserve Board and HUD, respectively, resulting in borrowers receiving separate TILA and RESPA disclosures. See CFPB, "Consumer Financial Protection Bureau Releases Assessment of TRID Mortgage Loan Disclosure Rule," October 1, 2020, https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-releases-assessment-trid-mortgage-loan-disclosure-rule/.
34.
35.
36.
37.
38.
39.
The public HMDA data set is available at the Federal Financial Institutions Examination Council's website at http://www.ffiec.gov/hmda/.
40.
41.
42.
43.
44.
45.
46.
47.
See Freddie Mac, "Mortgage Rates," http://www.freddiemac.com/pmms/; and Freddie Mac, "Primary Mortgage Market Survey—Definitions," http://www.freddiemac.com/pmms/weightings/weightings_series_011.html.
48.
49.
50.
51.
See CFPB, "CFPB Finalizes Rule to Improve Information About Access to Credit in the Mortgage Market," October 15, 2015, https://www.consumerfinance.gov/about-us/newsroom/cfpb-finalizes-rule-to-improve-information-about-access-to-credit-in-the-mortgage-market/; and CFPB, "Mortgage Data (HMDA): About HMDA," https://www.consumerfinance.gov/data-research/hmda/.
52.
See CFPB, "Consumer Financial Protection Bureau Issues Final Rule Raising Data Reporting Thresholds Under the Home Mortgage Disclosure Act," April 16, 2020, https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-final-rule-raising-data-reporting-thresholds-under-hmda/; and CFPB, "Home Mortgage Disclosure Reporting Requirements (HMDA)," https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/hmda-reporting-requirements/. Open-end credit is generally defined as credit in which the creditor reasonably contemplates repeated transactions, a finance charge is imposed on the outstanding balance, and the amount of credit is replenished to the extent the outstanding balance is repaid. Closed-end credit includes all credit that does not meet the definition of open-end credit. (See Federal Reserve, Rules on Home-Equity Credit Under the Truth in Lending Act, report to the Congress, November 1996, https://www.federalreserve.gov/boarddocs/rptcongress/he_study.pdf.) A home equity line of credit is an example of an open-end credit product, which allows borrowers to use some or all of their credit as well as to repay some or all of the outstanding balance over the maturity term. (The interest or finance charges are determined by the amount of the outstanding balance, similar to a credit card.) By contrast, a traditional mortgage is an example of a closed-end credit product with pre-determined principal and interest amounts that must be repaid in regular intervals and in full by the maturity date.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
For more detailed information about HOEPA, see CFPB, "High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X)," https://www.consumerfinance.gov/rules-policy/final-rules/high-cost-mortgage-and-homeownership-counseling-amendments-truth-lending-act-regulation-z-and-homeownership-counseling-amendments-real-estate-settlement-procedures-act-regulation-x/.
68.
69.
70.
71.
72.
73.
74.
HUD certifies housing counseling agencies that meet certain requirements. For more information, see HUD, "How to Become a HUD-Approved Housing Counseling Agency," https://www.hudexchange.info/programs/housing-counseling/agency-application/.
75.
76.
For more information, see Rachel Leary, "The Expanded Scope of High-Cost Mortgages Under the Dodd-Frank Wall Street Reform and Consumer Protection Act," Federal Reserve Bank of Philadelphia, https://consumercomplianceoutlook.org/2015/first-quarter/expanded-scope-of-high-cost-mortgages-under-dodd-frank-wall-street-reform-consumer-protection-act-2/; and Neil Bhutta et al., "Residential Mortgage Lending in 2016: Evidence from the Home Mortgage Disclosure Act Data," Federal Reserve Bulletin, November 2017, https://www.federalreserve.gov/publications/files/2016_HMDA.pdf.
77.
78.
79.
80.
81.
82.
The QM patch granted QM status to mortgages eligible for purchase by the Enterprises until January 10, 2021, or when they would exit conservatorship, whichever occurred earlier. See CFPB, "Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)," 78 Federal Register 6049, January 30, 2013; Bing Bai et al., "Has the QM Rule Made It Harder to Get a Mortgage?," Urban Institute, March 2016, https://www.urban.org/sites/default/files/publication/78266/https://www.urban.org/sites/default/files/publication/78266/
2000640-Has-the-QM-Rule-Made-It-Harder-to-Get-a-Mortgage.pdf; and 2000640-Has-the-QM-Rule-Made-It-Harder-to-Get-a-Mortgage.pdf; and Karan Kaul and Kaul and Laurie Goodman, Goodman, "What, If Anything,
Should Replace the QM GSE Patch?
Congressional Research Service
20
Single-Family Mortgage Pricing and Primary Market Policy Issues
replaced with a provision stating that it would be extended until the mandatory compliance date
of the final rule that amends the General QM definition, which was initially July 1, 2021.90
Despite support for the 2020 amendments from some in the mortgage industry,91 the CFPB issued
a final rule on April 30, 2021, to delay the mandatory compliance date of the 2020 final rule from
July 1, 2021, to October 1, 2022.92 The termination date of the Temporary GSE QM was also
extended to October 1, 2022.93 The CFPB also issued a new “seasoned QM” rule.94 Under this
rule, certain non-QM mortgages could become QMs or certain rebuttable presumption QMs could
become safe harbor QMs after a lender has held them in its own portfolio for a certain amount of
time and the loan met certain performance expectations over the period.
Author Information
Darryl E. Getter
Specialist in Financial Economics
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.
90 See CFPB, “Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): Extension of Sunset
Date,” 85 Federal Register 67938-67960, October 26, 2020.
91 See, for example, Mortgage Bankers Association, “MBA Urges No Delay to CFPB QM Final Rule,” April 7, 2021,
https://newslink.mba.org/mba-newslinks/2021/april/mba-newslink-wednesday-apr-7-2021Should Replace the QM GSE Patch?," Urban Institute, August 2018, https://www.urban.org/sites/default/files/publication/98949/2018_10_30_qualified_mortgage_rule_finalizedv2_0.pdf. Whether the Enterprises would purchase non-QMs was uncertain without the QM patch in place. For example, following passage of the Georgia Anti-Predatory Lending Act of 2002, the Enterprises announced that they would no longer purchase mortgages originated in Georgia to avoid the legal risk of assignee liability. For more information, see Jennifer Ablan, "Georgia Law Sparks Mortgage 'Crisis,'" Wall Street Journal, January 27, 2003, https://www.wsj.com/articles/SB1043452328933437504; Office of the Comptroller of the Currency, "Preemption Determination and Order," 68 Federal Register 46278, August 5, 2003; and Office of the Comptroller of the Currency, "Remarks by John D. Hawke, Jr., Comptroller of the Currency Before the Federalist Society," July 24, 2003, https://www.occ.treas.gov/news-issuances/speeches/2003/pub-speech-2003-57.pdf.
83.
84.
85.
86.
87.
Consistent with the current rule, the CFPB proposes higher thresholds for loans with smaller loan amounts and for subordinate-lien transactions, which typically have higher APRs. For more information on how the CFPB defines the benchmark APOR, see, CFPB, "What Is a 'Higher-Priced Mortgage Loan?,'" September 17, 2013, https://www.consumerfinance.gov/ask-cfpb/what-is-a-higher-priced-mortgage-loan-en-1797/.
88.
89.
See, for example, Mike Sorohan, "MBA Urges No Delay to CFPB QM Final Rule," Mortgage Bankers Association, April 7, 2021, https://newslink.mba.org/mba-newslinks/2021/april/mba-newslink-wednesday-apr-[phone number scrubbed]/mba-urges-no-delay-to-/mba-urges-no-delay-to-
cfpb-qm-final-rule/; and Center For Responsible Lending, cfpb-qm-final-rule/; and Center For Responsible Lending,“"CRL Statement on CFPBCRL Statement on CFPB’'s Plan to Revise Qualified s Plan to Revise Qualified
Mortgage Standards,Mortgage Standards,”" press release, January 24, 2020, https://www.responsiblelending.org/media/crl-statement-cfpbs- press release, January 24, 2020, https://www.responsiblelending.org/media/crl-statement-cfpbs-
plan-revise-qualified-mortgage-standardsplan-revise-qualified-mortgage-standards.
92 CFPB, “.
90.
CFPB, "Qualified Mortgage Definition Qualified Mortgage Definition underUnder the Truth in Lending Act (Regulation Z): General, the Truth in Lending Act (Regulation Z): General,”" 86 86 Federal
Register 22844-22860, April 30, 2021, https://www.federalregister.gov/documents/2021/04/30/2021-09028/qualified- 22844-22860, April 30, 2021, https://www.federalregister.gov/documents/2021/04/30/2021-09028/qualified-
mortgage-definition-under-the-truth-in-lending-act-regulation-z-general-qm-loan-definitionmortgage-definition-under-the-truth-in-lending-act-regulation-z-general-qm-loan-definition.
93 Because the GSEs purchase loans that meet the QM standards, questions that pertain to the legal liabilities of the
GSEs (and holders of GSE issuances) if they were to purchase non-QM loans are largely unknown at this time. See
letter from Kenneth E. Bentsen Jr., president, Securities Industry and Financial Markets Association, to U.S. Senate
Committee on Banking, Housing, and Urban Affairs Chairman Tim Johnson and Ranking Member Michael Crapo,
October 31, 2013, https://www.sifma.org/wp-content/uploads/2017/05/sifma-submits-comments-to-the-us-senate-
banking-committee-on-housing-finance-reform.pdf.
94 CFBP, “.
91.
CFBP, "Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): Seasoned QM Loan Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): Seasoned QM Loan
Definition,Definition,”" 85 85 Federal Register 86402-86455, December 29, 2020. This amendment was implemented as required by 86402-86455, December 29, 2020. This amendment was implemented as required by
EGRRCPA EGRRCPASection §101 (15 U.S.C. §1639c(b)(2)(F)).101 (15 U.S.C. §1639c(b)(2)(F)).
Congressional Research Service
R46980 · VERSION 1 · NEW
21
92.
Contents
- Introduction
- Mortgage Pricing Fundamentals
- The Influence of Disclosure and Reporting Requirements on Mortgage APRs
- TILA-RESPA Integrated Disclosures (TRID)
- The Home Mortgage Disclosure Act (HMDA)
- Introduction of the HMDA Rate Spread and 2008 Modifications
- HMDA Reporting Requirements and Recent Modifications
- Discouraging High-Cost Mortgage Offerings
- The Home Ownership Equity and Protection Act
- The Ability-to-Repay Requirement and Qualified Mortgage Rule
- The Initial 43% Debt-to-Income Requirement for QM Status
- Revisiting and Expansion of the QM Definitions
Summary
A mortgage is a loan secured by the underlying real estate collateral being financed by the loan. A mortgage is a loan secured by the underlying real estate collateral being financed by the loan.typically makes installment payments to repay the loantypically makes installment payments to repay the loan
additional financial risksadditional financial risks
are related to the housing purchase transaction and some linked to obtaining the mortgage that were not incorporated into the are related to the housing purchase transaction and some linked to obtaining the mortgage that were not incorporated into the
interest rate. interest rate. These charges may include loan origination fees (e.g.,
reporting data and verify borrowersreporting data and verify borrowers
(e.g., title insurancetitle insurance
the sum of the the sum of the
higher higher
residential mortgages. residential mortgages.
and, consequently, and, consequently,
' down payment sizes, regional variation in appraisal and settlement costs, and variation in seller-paid settlement costs. In other down payment sizes, regional variation in appraisal and settlement costs, and variation in seller-paid settlement costs. In other
APR that can be used as a benchmark for APR that can be used as a benchmark for
the primary mortgage market. For example, the Truth in Lending Act (P.L. 90-301), which applies to all forms of consumer the primary mortgage market. For example, the Truth in Lending Act (P.L. 90-301), which applies to all forms of consumer
credit, requires covered lenders to disclose APR offerings to prospective borrowers. The Real Estate Settlement Procedures credit, requires covered lenders to disclose APR offerings to prospective borrowers. The Real Estate Settlement Procedures
Act (P.L. 93-533Act (P.L. 93-533) requires disclosure of various settlement fees to borrowers. The
. These disclosure requirements may promote greater transparency and competitive transparency and competitive
on lenders on lenders
legislative actions may discourage excessive charges, legislative actions may discourage excessive charges,
regulatory costs.regulatory costs.
Introduction
A single-family mortgage is a loan secured by the underlying real estate collateral, a residential A single-family mortgage is a loan secured by the underlying real estate collateral, a residentialdwelling, which is being financed by the loan.dwelling, which is being financed by the loan.
interest rate component is based upon an applicable risk-free rate (generally, a U.S. Treasury interest rate component is based upon an applicable risk-free rate (generally, a U.S. Treasury
the annual percentage rate (APR), is the sum of the interest rate and various upfront fees the annual percentage rate (APR), is the sum of the interest rate and various upfront fees
expressed as a percentage. For any given APR, a expressed as a percentage. For any given APR, a
either higher upfront costs to lower the either higher upfront costs to lower the
Borrowers with less cash on hand, for example, may prefer to roll more costs into the Borrowers with less cash on hand, for example, may prefer to roll more costs into the
and maintain lower mortgage payments over the loan life. Because borrowers can choose APR configurations to benefit their budgets, mortgage cost comparisons are not so straightforward.
U.S. mortgages also have different maturities—the spans of time that borrowers have to repay their loans, which are typically 15 or 30 years. Mortgages with shorter maturities have lower interest rates relative to those with longer maturities. A mortgage can be repaid either in fixed or adjustable (variable) rate installment payments over the maturity term.3 Comparing the mortgage costs of a fixed rate relative to an adjustable rate (that fluctuates over the maturity term) is difficult without knowing the future path of variable interest rate movements. Mortgage prices also reflect the total cost if borrowers repay their loans as scheduled. However, borrowers can repay mortgages ahead of or behind schedule. These distinct features affect mortgage pricing.
In addition to comparison challenges, some borrowers are likely to obtain expensive residential mortgage loans for other possible reasons. First, borrowers with weak credit histories face higher borrowing costs than do those with better credit histories, because lenders typically require more compensation commensurate with taking greater credit (i.e., default) risks. Second, some borrowers may not have shopped for mortgages with lower rates and fees. Third, despite applicable laws and regulations aimed at reducing them (discussed in this report), fees associated with obtaining mortgages may not have been adequately disclosed to borrowers when they entered into the lending transactions. Fourth, borrowers may have obtained high-cost loans as a result of discrimination. Some research has found that minorities are more likely to pay rates above specified pricing thresholds (prior to controlling for some related borrower characteristics).4result from forms of predatory lending.result from forms of predatory lending.
of reasons and subsequently contribute to housing cost burdens.of reasons and subsequently contribute to housing cost burdens.
proliferation of high-cost loan offerings in the primary mortgage market. The following selected proliferation of high-cost loan offerings in the primary mortgage market. The following selected
laws may facilitate competitive pricing in the primary mortgage market:laws may facilitate competitive pricing in the primary mortgage market:
credit, which includes the loan rate and fees, in the form of an APR.credit, which includes the loan rate and fees, in the form of an APR.
borrowers with pertinent and timely disclosures regarding the nature and costs of borrowers with pertinent and timely disclosures regarding the nature and costs of
the real estate settlement or closing costs.the real estate settlement or closing costs.
closing costs, include fees for appraisals, title searches, document preparation, closing costs, include fees for appraisals, title searches, document preparation,
and processing services—various costs associated with obtaining the mortgage and processing services—various costs associated with obtaining the mortgage
itself (as opposed to costs of the residential property).itself (as opposed to costs of the residential property).
origination patterns allows regulators to determine where further investigation of origination patterns allows regulators to determine where further investigation of
geographical discrimination, also known as redlining, may be necessary to geographical discrimination, also known as redlining, may be necessary to
increase credit access to creditworthy individuals and discourage discriminatory increase credit access to creditworthy individuals and discourage discriminatory
loan markup pricing practices.loan markup pricing practices.
they make higher-priced loans, which arguably has the effect of discouraging practices that would they make higher-priced loans, which arguably has the effect of discouraging practices that would
result in expensive or predatory loan offeringsresult in expensive or predatory loan offerings
non-purchase loans secured by primary (owner-occupied) residences.non-purchase loans secured by primary (owner-occupied) residences.
among other things. Examples include establishing the CFPB to implement and among other things. Examples include establishing the CFPB to implement and
enforce federal consumer financial laws while ensuring consumersenforce federal consumer financial laws while ensuring consumers
financial products and services. The CFPB has regulatory authority over banking financial products and services. The CFPB has regulatory authority over banking
and nonbanking firms that offer consumer financial products. The Dodd-Frank and nonbanking firms that offer consumer financial products. The Dodd-Frank
Act also created the ability-to-repay (ATR) requirement, implemented by the Act also created the ability-to-repay (ATR) requirement, implemented by the
CFPB, to establish minimum standards that all creditors must consider during the CFPB, to establish minimum standards that all creditors must consider during the
underwriting of U.S. residential mortgage originations. Lenders may reduce their underwriting of U.S. residential mortgage originations. Lenders may reduce their
potential legal liabilities by demonstrating proof of compliance with ATR via potential legal liabilities by demonstrating proof of compliance with ATR via
originating qualified mortgages, discussed in the last section of this report.originating qualified mortgages, discussed in the last section of this report.
legislative and regulatory approaches to facilitate legislative and regulatory approaches to facilitate
discussed in two discussed in two
sections. First, mandatory interest rate and associated fee disclosures are interest rate and associated fee disclosures are
costs may limit credit access to some qualified low- and moderate-income borrowers.costs may limit credit access to some qualified low- and moderate-income borrowers.
U.S. Treasury bonds) at different maturitiesU.S. Treasury bonds) at different maturities
government government
additional default and prepayment risks of private sector borrowers. additional default and prepayment risks of private sector borrowers.
Figure 1. The Treasury Yield Curve
Source: U.S. Department of Treasury, Daily Treasury Yield Curve Rates.U.S. Department of Treasury, Daily Treasury Yield Curve Rates.
Notes: The July 1, 2018, snapshot was chosen to avoid unusual anomalies that are likely to affect the shape of The July 1, 2018, snapshot was chosen to avoid unusual anomalies that are likely to affect the shape of
the yield curve, such as the Great Recession of 2008 or the COVID-19 pandemic.the yield curve, such as the Great Recession of 2008 or the COVID-19 pandemic.
default risks that are default risks that are
a comparable 30-year U.S. Treasury rate as the benchmark minimum compensation rate, which a comparable 30-year U.S. Treasury rate as the benchmark minimum compensation rate, which
would correspond with the maturity length of a 30-year mortgage, a Treasury with a shorter would correspond with the maturity length of a 30-year mortgage, a Treasury with a shorter
maturity is frequently used to reflect the prepayment risk of most borrowers. Specifically, a 10-maturity is frequently used to reflect the prepayment risk of most borrowers. Specifically, a 10-
year Treasury bond is considered a better approximation of the prepayment risk associated with year Treasury bond is considered a better approximation of the prepayment risk associated with
the traditional 30-year fixed rate mortgage.the traditional 30-year fixed rate mortgage.
mortgage and obtaining a new one with a lower interest rate). Borrowers also prepay if they sell mortgage and obtaining a new one with a lower interest rate). Borrowers also prepay if they sell
their homes before fully repaying their mortgages. Because borrowers are their homes before fully repaying their mortgages. Because borrowers are
same mortgage same mortgage
that of 10-year Treasury bonds.that of 10-year Treasury bonds.
bonds tend to move in similar directionsbonds tend to move in similar directions
possible mortgage market irregularities when these rate movements do not coincide.possible mortgage market irregularities when these rate movements do not coincide.
premiums to reimburse lenders for potential losses. Although higher-risk borrowers pay more for premiums to reimburse lenders for potential losses. Although higher-risk borrowers pay more for
their mortgages relative to lower-risk borrowers, risk-based pricing their mortgages relative to lower-risk borrowers, risk-based pricing
denials and greater credit accessibility. Borrowers can pay for the default risk they pose either in denials and greater credit accessibility. Borrowers can pay for the default risk they pose either in
the form of additional basis points or by separately purchasing mortgage insurance, usually the form of additional basis points or by separately purchasing mortgage insurance, usually
assessed as a combination of an upfront fee and additional basis points.assessed as a combination of an upfront fee and additional basis points.
frequently includes historical information about credit repayment, tenant payment, employment, insurance claims, frequently includes historical information about credit repayment, tenant payment, employment, insurance claims,
and check writing and account management. Consumer filesand check writing and account management. Consumer files
income or assets. Consumer reports generally cannot include information on items such as race or ethnicity, income or assets. Consumer reports generally cannot include information on items such as race or ethnicity,
religious or political preference, or medical history. religious or political preference, or medical history.
origination of a single-family mortgage, a mortgage servicer receives a monthly fee to perform origination of a single-family mortgage, a mortgage servicer receives a monthly fee to perform
various administrative tasks—collecting and remitting the principal and interest payments to the various administrative tasks—collecting and remitting the principal and interest payments to the
mortgage lender; managing the borrowermortgage lender; managing the borrower
full; and administering loss mitigation (e.g., forbearance plans) or foreclosure resolution on full; and administering loss mitigation (e.g., forbearance plans) or foreclosure resolution on
behalf of the lender if the borrower falls behind or fails to make full payment.behalf of the lender if the borrower falls behind or fails to make full payment.19 A mortgage A mortgage
servicing right generates a servicing fee typically averaging 25 basis points (0.25% or $250 per servicing right generates a servicing fee typically averaging 25 basis points (0.25% or $250 per
$100,000 of an outstanding mortgage balance) per $100,000 of an outstanding mortgage balance) per
price. Instead, the APR represents the price. Instead, the APR represents the total annual borrowing costs of a loan expressed as a annual borrowing costs of a loan expressed as a
percentage. The APR calculation includes percentage. The APR calculation includes both the mortgage coupon the mortgage coupon
origination fees, the costs of appraisals, title insurance, and upfront premiums charged to cover origination fees, the costs of appraisals, title insurance, and upfront premiums charged to cover
mortgage default riskmortgage default risk. Table 1 summarizes the APR calculations—the sum of the mortgage summarizes the APR calculations—the sum of the mortgage
coupon and upfront costs.coupon and upfront costs.
Table 1. Simplified Single-Family Mortgage Pricing Example
Line Item
Percent
Payment Frequency
to 30-year Mortgage)to 30-year Mortgage)
2.82%
282
ongoing (monthly)
Default Risk (Ongoing Component of Insurance Premium/Guarantee Fee)
0.56%
56
ongoing (monthly)
Servicing Fee
0.25%
25
ongoing (monthly)
MORTGAGE COUPON (Subtotal)
3.63%
363
Origination Fee
0.50%
50
upfront
Premium/Guarantee Fee)Premium/Guarantee Fee)
0.70%
70
upfront
ANNUAL PERCENTAGE RATE (APR)
4.83%
483
Source: CRS hypothetical example.
Notes: The 2.82% base rate is the 10-year Treasury rate obtained from the July 1, 2018, yield curve The 2.82% base rate is the 10-year Treasury rate obtained from the July 1, 2018, yield curve1. The 0.5% origination fee is based upon the average points and fees reported from the Freddie Mac Primary The 0.5% origination fee is based upon the average points and fees reported from the Freddie Mac Primary
Mortgage Market Survey for the week of July 5, 2018. The remaining numbers are arguably feasible assumptions.Mortgage Market Survey for the week of July 5, 2018. The remaining numbers are arguably feasible assumptions.
derived similarly to the process described above to establish mortgage coupons. derived similarly to the process described above to establish mortgage coupons.
adjustments to add to a designated minimum base rate.adjustments to add to a designated minimum base rate.
adjustments adjustments to the mortgage coupons capture differences in borrower characteristics (e.g., credit score, loan-to-value ratiocapture differences in borrower characteristics (e.g., credit score, loan-to-value ratio
compensation for lenders.compensation for lenders.
23 The Secondary Mortgage Market Influence on Primary Mortgage Pricing
be sold and bought by investors—the be sold and bought by investors—the
lower minimum base rates, which are used as the floors for mortgage coupons.lower minimum base rates, which are used as the floors for mortgage coupons.
originations, these entities retain the default risk and then sell to private investors the remaining prepayment risk originations, these entities retain the default risk and then sell to private investors the remaining prepayment risk
(in the form of mortgage-backed securities [MBSs]).(in the form of mortgage-backed securities [MBSs]).
to both types of mortgage risks) to both types of mortgage risks)
in funds supplied for primary market mortgage originations in funds supplied for primary market mortgage originations
Additionally, secondary mortgage markets mitigate the emergence of Additionally, secondary mortgage markets mitigate the emergence of liquidity
transactions cost that arises because the buying or selling of financial assets (e.g., whole mortgages with both transactions cost that arises because the buying or selling of financial assets (e.g., whole mortgages with both
default and prepayment risks) cannot occur quickly. A buyer must pay a liquidity premium for (or a seller must default and prepayment risks) cannot occur quickly. A buyer must pay a liquidity premium for (or a seller must
discount the value of) an asset to hasten the incidence of a transaction. MBSs traded in secondary markets tend to discount the value of) an asset to hasten the incidence of a transaction. MBSs traded in secondary markets tend to
trade with lower liquidity premiums compared to whole mortgages.trade with lower liquidity premiums compared to whole mortgages.
emerge in secondary markets, they would likely appear in minimum base rates as additional basis points above the emerge in secondary markets, they would likely appear in minimum base rates as additional basis points above the
initial adjustment for prepayment risk (not including the other loan level price adjustments).initial adjustment for prepayment risk (not including the other loan level price adjustments).
and the 10-year Treasury rates), then the and the 10-year Treasury rates), then the
would would
28 The Influence of Disclosure and Reporting
Requirements on Mortgage APRs
The law of one price (LOOP) The law of one price (LOOP)
should have identical prices.should have identical prices.
have access to sufficient and equivalent information, then achieving the LOOP—or at least have access to sufficient and equivalent information, then achieving the LOOP—or at least
pricing within a tolerable range—pricing within a tolerable range—
cases, settlement fees.cases, settlement fees.
non-traditional mortgage products with features such as balloon payments or term lengths in non-traditional mortgage products with features such as balloon payments or term lengths in
which an adjustable interest rate is locked.which an adjustable interest rate is locked.
without relevant comparisons. without relevant comparisons.
disclosures to increase mortgage pricing transparency for borrowers. HMDA and HOEPA have disclosures to increase mortgage pricing transparency for borrowers. HMDA and HOEPA have
actions discussed in this section actions discussed in this section
TILA-RESPA Integrated Disclosures (TRID)
A lack of transparency with respect to loan terms and settlement costs can make it difficult for A lack of transparency with respect to loan terms and settlement costs can make it difficult for
consumers to make well-informed decisions when choosing mortgage products. Inadequate consumers to make well-informed decisions when choosing mortgage products. Inadequate
disclosures can make some borrowers more vulnerable to predatory, discriminatory, and disclosures can make some borrowers more vulnerable to predatory, discriminatory, and
fraudulent lending practices. In addition, when costs are hidden from borrowers, they become fraudulent lending practices. In addition, when costs are hidden from borrowers, they become
vulnerable to payment shocks that could possibly lead to financial distress or even foreclosure.vulnerable to payment shocks that could possibly lead to financial distress or even foreclosure.
congressional actions. For example, TILAcongressional actions. For example, TILA
before borrowers enter into any transactions. In addition, RESPAbefore borrowers enter into any transactions. In addition, RESPA
the settlement or closing costs. Examples of such costs include loan origination fees or points, the settlement or closing costs. Examples of such costs include loan origination fees or points,
credit report fees, property appraisal fees, mortgage insurance fees, title insurance fees, home and credit report fees, property appraisal fees, mortgage insurance fees, title insurance fees, home and
flood insurance fees, recording fees, attorney fees, and escrow account deposits. RESPA also flood insurance fees, recording fees, attorney fees, and escrow account deposits. RESPA also
includes the following provisions:includes the following provisions:
good faith estimates of the settlement service costs borrowers should expect at the closing of their good faith estimates of the settlement service costs borrowers should expect at the closing of their
mortgage loansmortgage loans
and enforcement authority of TILA and RESPA, along with other existing consumer protection and enforcement authority of TILA and RESPA, along with other existing consumer protection
disclosure form to satisfy both TILA and RESPA disclosure requirements.disclosure form to satisfy both TILA and RESPA disclosure requirements.
34 In 2013, the CFPB issued the TILA-RESPA Integrated Disclosure (TRID) final rule.2013, the CFPB issued the TILA-RESPA Integrated Disclosure (TRID) final rule.
and closing on a mortgage loan. Consumers must receive two standardized forms: the and closing on a mortgage loan. Consumers must receive two standardized forms: the
faith estimate of the loan terms and closing costs, must be delivered to the consumer no later than faith estimate of the loan terms and closing costs, must be delivered to the consumer no later than
three business days after the consumer submits a mortgage application. The three business days after the consumer submits a mortgage application. The
closing disclosure form must be received at least three days before settlement of the loan. The final form must be received at least three days before settlement of the loan. The final
CFPB amended and clarified various mortgage disclosure provisions in 2017, including CFPB amended and clarified various mortgage disclosure provisions in 2017, including
provisions pertaining to escrow closing notices, construction loans, simultaneous subordinate lien provisions pertaining to escrow closing notices, construction loans, simultaneous subordinate lien
loans, tolerances for the total of payments disclosure, and other disclosure requirements.loans, tolerances for the total of payments disclosure, and other disclosure requirements.
2018, the CFPB amended TRID to facilitate the ability to pass permissible costs to affected 2018, the CFPB amended TRID to facilitate the ability to pass permissible costs to affected
consumers under circumstances when unanticipated cost increases occurred after consumers under circumstances when unanticipated cost increases occurred after
other consumers by pricing future loans with added margins.other consumers by pricing future loans with added margins.
37 The Home Mortgage Disclosure Act (HMDA)
HMDA was enacted in 1975 to assist government regulators and the private sector with the HMDA was enacted in 1975 to assist government regulators and the private sector with the
monitoring of anti-discriminatory practices.monitoring of anti-discriminatory practices.
Dodd-Frank Act transferred HMDA rulemaking authority, which was initially given to the Dodd-Frank Act transferred HMDA rulemaking authority, which was initially given to the
Federal Reserve Board, to the CFPB.Federal Reserve Board, to the CFPB.
HMDA was enacted. Financial institutions allegedly accepted deposits but did not make mortgage HMDA was enacted. Financial institutions allegedly accepted deposits but did not make mortgage
loans in certain neighborhoods. Consequently, institutions covered by HMDA were required to loans in certain neighborhoods. Consequently, institutions covered by HMDA were required to
report home mortgage originations by geographic area, financial institution type, borrower race, report home mortgage originations by geographic area, financial institution type, borrower race,
sex, income, and whether the loans were for home purchase or refinance.sex, income, and whether the loans were for home purchase or refinance.
would show geographical patterns of mortgage originations and help regulators determine would show geographical patterns of mortgage originations and help regulators determine
localities where further investigation of discrimination, known as redlining, was necessary. In localities where further investigation of discrimination, known as redlining, was necessary. In
1989, Congress expanded HMDA to include the race, sex, and 1989, Congress expanded HMDA to include the race, sex, and
applicants applicants
regulators to monitor differences in mortgage loan denial rates by income, race, and gender. The regulators to monitor differences in mortgage loan denial rates by income, race, and gender. The
following sections discuss further amendments affecting HMDA reporting requirements.following sections discuss further amendments affecting HMDA reporting requirements.
Introduction of the HMDA Rate Spread and 2008 Modifications
mortgage credit pricing. Beginning in the 1990s, credit became increasingly available for less mortgage credit pricing. Beginning in the 1990s, credit became increasingly available for less
creditworthy borrowers, particularly with wider adoption of credit scoring technology.creditworthy borrowers, particularly with wider adoption of credit scoring technology.
of turning down loan requests for borrowers of lower credit quality, lenders began charging these of turning down loan requests for borrowers of lower credit quality, lenders began charging these
borrowers higher interest rates to compensate for the additional default risks.borrowers higher interest rates to compensate for the additional default risks.
practice of charging different loan rates to different groups led regulators to question the extent practice of charging different loan rates to different groups led regulators to question the extent
that mortgage pricing patterns reflected differences in credit risk rather than discrimination.that mortgage pricing patterns reflected differences in credit risk rather than discrimination.
time, the rate spread was defined as the difference between the APR for a 30-year (fixed or time, the rate spread was defined as the difference between the APR for a 30-year (fixed or
adjustable rate) mortgage loan and the rate of a U.S. Treasury security of comparable maturity. adjustable rate) mortgage loan and the rate of a U.S. Treasury security of comparable maturity.
The mortgage interest rate was not chosen because it contains only the cost of the principal loan The mortgage interest rate was not chosen because it contains only the cost of the principal loan
amount expressed as a percentage. By contrast, the APR includes the cost of the principal loan amount expressed as a percentage. By contrast, the APR includes the cost of the principal loan
amount, insurance, and other upfront fees—all expressed as a percentage. The law requiring rate amount, insurance, and other upfront fees—all expressed as a percentage. The law requiring rate
spread information was implemented in 2004.spread information was implemented in 2004.
excessive higher-priced lendingexcessive higher-priced lending
durations. As previously discussed, the 10-year Treasury securities better tracks the durations of durations. As previously discussed, the 10-year Treasury securities better tracks the durations of
30-year mortgages due to borrower prepayment behavior. By relying on 30-year Treasury rates, 30-year mortgages due to borrower prepayment behavior. By relying on 30-year Treasury rates,
rate spreads were highly sensitive to Treasury yield curve movements. For example, short-term rate spreads were highly sensitive to Treasury yield curve movements. For example, short-term
rates tend to rise higher than long-term rates following a sudden demand for cash by financial rates tend to rise higher than long-term rates following a sudden demand for cash by financial
institutions or deteriorating macroeconomic conditions. Over the first half of 2008, declines in the institutions or deteriorating macroeconomic conditions. Over the first half of 2008, declines in the
30-year Treasury rates led to wider rate spreads and greater HMDA reporting. The reported rate 30-year Treasury rates led to wider rate spreads and greater HMDA reporting. The reported rate
spreads, however, reflected yield curve rotations rather than a greater incidence of high-cost spreads, however, reflected yield curve rotations rather than a greater incidence of high-cost
mortgage pricing.mortgage pricing.
to reduce the sensitivity of the rate spreads to yield curve movements, thus enhancing the to reduce the sensitivity of the rate spreads to yield curve movements, thus enhancing the
reliability of the collected data.reliability of the collected data.
Freddie Mac, surveys lenders on the mortgage coupon and total charges at settlement for their Freddie Mac, surveys lenders on the mortgage coupon and total charges at settlement for their
most common mortgage products (e.g., 30-year fixed rate, 15-year fixed rate, certain most common mortgage products (e.g., 30-year fixed rate, 15-year fixed rate, certain
adjustable rate mortgage products) and reports the average of these loan terms, known as the average prime offer rates products) and reports the average of these loan terms, known as the average prime offer rates
(APORs).(APORs).
other words, HMDA rate spreads are defined as the difference between the APR and the APOR. other words, HMDA rate spreads are defined as the difference between the APR and the APOR.
The reporting thresholds were also revised. For first mortgage loans, reporting is triggered when The reporting thresholds were also revised. For first mortgage loans, reporting is triggered when
the rate spread equals or is greater than 1.5 percentage points. For second mortgage loans, the the rate spread equals or is greater than 1.5 percentage points. For second mortgage loans, the
reporting threshold equals or is greater than 3.5 percentage points. The APORs, comprised of reporting threshold equals or is greater than 3.5 percentage points. The APORs, comprised of
mortgage coupons that use the 10-year Treasury as the base rate, follow mortgage market activity mortgage coupons that use the 10-year Treasury as the base rate, follow mortgage market activity
more closely than more closely than does the 30-year Treasury rate. Going forward, the reported rate spreads would the 30-year Treasury rate. Going forward, the reported rate spreads would
contain less variability such that any observed deviations would likely be more reliable indicators contain less variability such that any observed deviations would likely be more reliable indicators
of mortgage pricing irregularities.of mortgage pricing irregularities.
HMDA Reporting Requirements and Recent Modifications
(i.e., banks and credit unions) and nondepository financial institutions.(i.e., banks and credit unions) and nondepository financial institutions.
institution is subject to HMDA reporting if it exceeds an asset-size threshold published annually institution is subject to HMDA reporting if it exceeds an asset-size threshold published annually
in the in the Federal Register, has a home or branch office located in a metropolitan statistical area, has , has a home or branch office located in a metropolitan statistical area, has
originated at least one home purchase or refinance home loan, is federally insured or federally originated at least one home purchase or refinance home loan, is federally insured or federally
regulated, and meets the loan-volume thresholds discussed in the next paragraph. A banking regulated, and meets the loan-volume thresholds discussed in the next paragraph. A banking
institution must also have received a positive rating from its most recent Community institution must also have received a positive rating from its most recent Community
Reinvestment Act examination to be eligible for HMDA partial exemptions. A nondepository Reinvestment Act examination to be eligible for HMDA partial exemptions. A nondepository
financial institution is subject to HMDA reporting if it financial institution is subject to HMDA reporting if it
has a home or branch office located in a metropolitan statistical area at which the institution accepts a home or branch office located in a metropolitan statistical area at which the institution accepts
applications from the public for covered mortgages, and it meets the loan-volume thresholds applications from the public for covered mortgages, and it meets the loan-volume thresholds
modified by the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act modified by the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA, P.L. 115-174(EGRRCPA, P.L. 115-174).
mandating the CFPB to include additional information about applicants (e.g., credit scores, age, mandating the CFPB to include additional information about applicants (e.g., credit scores, age,
debt-to-income ratios); additional information about the loan features (e.g., introductory rate debt-to-income ratios); additional information about the loan features (e.g., introductory rate
housing; and other information.housing; and other information.
whether any observed pricing differentials reflect differences in borrowerswhether any observed pricing differentials reflect differences in borrowers
discrimination, thus capturing more information about influences on lending decisions. However, discrimination, thus capturing more information about influences on lending decisions. However,
the costs associated with the collection and transmission of large amounts of digital data are the costs associated with the collection and transmission of large amounts of digital data are
lower per transaction for firms with large volumes and higher for those with lower volumes of lower per transaction for firms with large volumes and higher for those with lower volumes of
mortgage transactions.mortgage transactions.
reporting requirements, had not been required to report numerous variables used to evaluate reporting requirements, had not been required to report numerous variables used to evaluate
applicants given that (1) federal regulatory agencies could obtain loan data from financial applicants given that (1) federal regulatory agencies could obtain loan data from financial
institutions they wish to examine more closelyinstitutions they wish to examine more closely
which could compromise the privacy of individuals holding reported loans. For this reason, the which could compromise the privacy of individuals holding reported loans. For this reason, the
public data are currently modified to protect applicant and borrower privacy.public data are currently modified to protect applicant and borrower privacy.
entities with lower origination volumes. On April 16, 2020, the CFPB issued a final rule entities with lower origination volumes. On April 16, 2020, the CFPB issued a final rule
implementing these loan-volume thresholds for reporting open- and closed-implementing these loan-volume thresholds for reporting open- and closed-
mortgages, which was set at 25 loans over two calendar years, has been increased to 100 loans mortgages, which was set at 25 loans over two calendar years, has been increased to 100 loans
over two calendar years. For open-end lines of credit, the permanent threshold for reporting data over two calendar years. For open-end lines of credit, the permanent threshold for reporting data
is set at 200 effective January 1, 2022 (following expiration of the temporary higher threshold of is set at 200 effective January 1, 2022 (following expiration of the temporary higher threshold of
500 open-end lines of credit that was increased from 100 in 2018).500 open-end lines of credit that was increased from 100 in 2018).
requirements are applicable.requirements are applicable.
mentioned loan-volume thresholds, then it qualifies for the partial exemption (although it may mentioned loan-volume thresholds, then it qualifies for the partial exemption (although it may
still voluntarily report the eligible data). Some of the data eligible for a partial exemption include still voluntarily report the eligible data). Some of the data eligible for a partial exemption include
reasons for denial (if applicable), the borrowerreasons for denial (if applicable), the borrower
rate, rate spread, total points and fees, and origination charges, among other things. The rate, rate spread, total points and fees, and origination charges, among other things. The
remaining 22 data points do not qualify for a partial exemption and must be reported. Some of the remaining 22 data points do not qualify for a partial exemption and must be reported. Some of the
mandatory data include ethnicity, race, sex, age, income, state, county, census tract, and HOEPA mandatory data include ethnicity, race, sex, age, income, state, county, census tract, and HOEPA
status (high-cost loans discussed in the section below status (high-cost loans discussed in the section below
Protection ActProtection Act
to a May 2021 Government Accountability Office (GAO) report, the overall impact has been to a May 2021 Government Accountability Office (GAO) report, the overall impact has been
collected from less densely populated areas (e.g., rural areas).collected from less densely populated areas (e.g., rural areas).
monitor mortgage pricing in these localitiesmonitor mortgage pricing in these localities
of 2008 [P.L. 110-289])of 2008 [P.L. 110-289])
falling below the threshold for open-ended lines of credit are not required to report the relevant falling below the threshold for open-ended lines of credit are not required to report the relevant
data points that would confirm their eligibility for the partial exemption.data points that would confirm their eligibility for the partial exemption.
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Small-Dollar Mortgages Small-dollar mortgages, used for purchasing lower-priced homes, are defined as being at or below certain median home price thresholds (e.g., $70,000, $100,000, or $150,000), which vary over time and by geographical areas.58 Originating small-dollar loans face profitability and regulatory challenges. A small-dollar mortgage may not be profitable if the interest income generated from the principal mortgage balance does not adequately cover a lender's fixed origination and servicing costs.59 A servicer may be less willing to perform the usual servicing tasks, or oversee a mortgage in arrears, for small outstanding mortgage balances that do not generate full compensation. Furthermore, maintaining the APR of a small-dollar mortgage at or below the 1.5% HMDA threshold can be difficult considering that the standard calculation—with the numerator consisting of the contemporaneous interest rate and standard origination and settlement fees—would use an atypical, lower denominator. Despite the abovementioned challenges, the Community Reinvestment Act may incentivize banks to originate small-dollar loans.60 Credit unions may have greater flexibility to provide their members with customized loan products—including small-dollar mortgages—for specialized credit needs.61 Some small banks and credit unions may originate these loans because their mortgage lending activities—small or otherwise—are not large enough to be eligible for HMDA reporting, allowing them to circumvent the threshold compliance issue.62 Nevertheless, small-dollar mortgages are still considered to be in short supply. |
Regulators currently have large amounts of data regarding creditworthy prime borrowers with similar and more predictable prepayment and default rates. The APOR used to determine HMDA rate spread eligibility is largely calculated using the mortgage terms offered to prime borrowers.63 Consequently, advancement toward a more ideal LOOP outcome is more likely to occur in the primary mortgage market consisting largely of prime (creditworthy) borrowers.
By contrast, advancement toward a narrow APR range is more challenging for primary mortgage markets that consist largely of borrowers with weaker or nonexistent credit histories. Increasing lenders' costs to provide high-cost mortgage products is an approach designed to deter abusive lending practices. This approach is conceptually analogous to applying a so-called Pigouvian tax, which raises the cost of a practice that imposes a societal cost, thereby discouraging the imposes a societal cost, thereby discouraging thepractice.practice.
The Home Ownership Equity and Protection Act
Although additional compensation for lenders to take elevated credit risks may be justified, the Although additional compensation for lenders to take elevated credit risks may be justified, the
charges arguably may not be proportional to and possibly exceed the additional credit risks posed charges arguably may not be proportional to and possibly exceed the additional credit risks posed
by some borrowers. Determining the appropriate amount of additional basis points lenders should by some borrowers. Determining the appropriate amount of additional basis points lenders should
charge for various gradations of elevated default risk is complicated, because fewer defaults are charge for various gradations of elevated default risk is complicated, because fewer defaults are
observed when house prices are stable or rising.observed when house prices are stable or rising.
charges are proportional to elevated default risks or linked to unobservable factors such as charges are proportional to elevated default risks or linked to unobservable factors such as
inadvertent (disparate treatment) or overt discrimination—even with the use of statistical inadvertent (disparate treatment) or overt discrimination—even with the use of statistical
analysis—may be challenging for regulators when conducting fair lending examinations.analysis—may be challenging for regulators when conducting fair lending examinations.66
originating high-cost refinance and other non-purchase mortgages secured by their principal originating high-cost refinance and other non-purchase mortgages secured by their principal
residences.residences.
monetary damages) borne by the lenders.monetary damages) borne by the lenders.
following revisions to expand HOEPA coveragefollowing revisions to expand HOEPA coverage
points on a first mortgage or 10 percentage points on a second mortgage or if the points on a first mortgage or 10 percentage points on a second mortgage or if the
consumer pays total points and fees exceeding the consumer pays total points and fees exceeding the greater of 8% or a dollar of 8% or a dollar
amount that is adjusted annually based upon the Consumer Price Index. (This amount that is adjusted annually based upon the Consumer Price Index. (This
definition was modified in 2010 as discussed below.)definition was modified in 2010 as discussed below.)
three-day right of rescission generally required by TILA, which means a total of three-day right of rescission generally required by TILA, which means a total of
six days to decide whether or not to enter into the transaction.six days to decide whether or not to enter into the transaction.
requirements.requirements.
Part 226, Sections 31, 32, and 34).Part 226, Sections 31, 32, and 34).
lenders—including non-bank entities that do not have primary prudential regulators.lenders—including non-bank entities that do not have primary prudential regulators.
amended rule also prohibited lenders from making loans based upon the amended rule also prohibited lenders from making loans based upon the
regard for the regard for the
verification of income and assets for determining repayment ability. Further, higher-cost loans verification of income and assets for determining repayment ability. Further, higher-cost loans
may not have prepayment penalties lasting for more than two years, and prepayment penalties are may not have prepayment penalties lasting for more than two years, and prepayment penalties are
not allowed for loans in which the monthly payment can change during the initial four years. not allowed for loans in which the monthly payment can change during the initial four years.
Finally, escrow accounts for property taxes and homeownersFinally, escrow accounts for property taxes and homeowners
all first-lien mortgages. These additional protections apply to all higher-priced loansall first-lien mortgages. These additional protections apply to all higher-priced loans
lien mortgages with APRs 1.5% above the applicable APOR or subordinate-lien mortgages with lien mortgages with APRs 1.5% above the applicable APOR or subordinate-lien mortgages with
APRs 3.5% above the applicable APOR.APRs 3.5% above the applicable APOR.
implemented by the CFPB.implemented by the CFPB.
mortgage, (2) the consumer pays total points and fees exceeding 5% of the total mortgage, (2) the consumer pays total points and fees exceeding 5% of the total
loan amount, or (3) the consumer pays total points and fees loan amount, or (3) the consumer pays total points and fees
of 8% or $1,000 for loans of 8% or $1,000 for loans that are less than $20,000 (with the dollar amounts adjusted less than $20,000 (with the dollar amounts adjusted
annually for inflation).annually for inflation).
of the amount prepaid.of the amount prepaid.
underwriting, and brokerunderwriting, and broker
upfront mortgage insurance premium in excess of the Federal Housing upfront mortgage insurance premium in excess of the Federal Housing
Administration (FHA) upfront premium.Administration (FHA) upfront premium.
certified or approved homeownership counselor.certified or approved homeownership counselor.
share of the mortgage market and are concentrated among very few lenders.share of the mortgage market and are concentrated among very few lenders.
declined markedly after new regulations were implemented to amend the definition of declined markedly after new regulations were implemented to amend the definition of high-cost
mortgage to cover more types of loans. to cover more types of loans.
legal risks significantly raise lenderslegal risks significantly raise lenders
originations with features that could exacerbate borrowersoriginations with features that could exacerbate borrowers
The Ability-to-Repay Requirement and Qualified Mortgage Rule
On January 10, 2013, the CFPB released a final rule implementing the On January 10, 2013, the CFPB released a final rule implementing the
ATR requirement of the Dodd-Frank Act, which became effective on January 10, 2014.77 The Dodd-Frank Act requires lenders to verify borrowers'
HOEPA violations, the Dodd-Frank Act provides enhanced damages for violation of the ATR HOEPA violations, the Dodd-Frank Act provides enhanced damages for violation of the ATR
requirement.requirement.
the ATR rule.the ATR rule.
's ability to repay the loan according to its terms. Before making a residential mortgage loanability to repay the loan according to its terms. Before making a residential mortgage loan
the borrower: (1) current or reasonably expected income or assets; (2) current employment status; the borrower: (1) current or reasonably expected income or assets; (2) current employment status;
(3) monthly payments of principal and interest on the primary mortgage lien; (4) monthly (3) monthly payments of principal and interest on the primary mortgage lien; (4) monthly
payment on any junior mortgage lien; (5) monthly payment for mortgage-related obligations (e.g., payment on any junior mortgage lien; (5) monthly payment for mortgage-related obligations (e.g.,
property taxes, homeowner association fees); (6) any additional debt obligations (e.g., property taxes, homeowner association fees); (6) any additional debt obligations (e.g.,
automobile, credit card, education); (7) monthly DTI ratio or residual income; and (8) credit automobile, credit card, education); (7) monthly DTI ratio or residual income; and (8) credit
history.history.
requirements,requirements,
meet certain product feature and underwriting requirements. The mortgage must fully amortize, meet certain product feature and underwriting requirements. The mortgage must fully amortize,
meaning that the borrowermeaning that the borrower
principal loan balance over time. A general QM cannot have a balloon or large principal payment principal loan balance over time. A general QM cannot have a balloon or large principal payment
due at the end of the loandue at the end of the loan, nor can it have a loan term that exceeds 30 years. Furthermore, a general QM loan cannot negatively amortize, meaning . Furthermore, a general QM loan cannot negatively amortize, meaning
that its principal loan balance cannot increase over time.that its principal loan balance cannot increase over time.
higher costs for improper underwritinghigher costs for improper underwriting
situations. Specifically, a general QM receives a situations. Specifically, a general QM receives a rebuttable presumption of compliance with ATR. of compliance with ATR.
In other words, a borrower may still In other words, a borrower may still
presented to presented to
indicated that the borrowerindicated that the borrower
paying the mortgage and other debts. If, however, additional underwriting requirements paying the mortgage and other debts. If, however, additional underwriting requirements
(described below) are met, a lender originating a general QM can receive (described below) are met, a lender originating a general QM can receive safe harbor legal legal
protection, meaning that protection, meaning that
subsequent secondary-market purchaser) subsequent secondary-market purchaser)
criteria.criteria.
The Initial 43% Debt-to-Income Requirement for QM Status
requirements for a loan to receive QM status under the 2014 final rule.requirements for a loan to receive QM status under the 2014 final rule.
exceeding 43% would still qualify as QMs if they meet the eligibility requirements to be insured exceeding 43% would still qualify as QMs if they meet the eligibility requirements to be insured
or guaranteed by FHA, or guaranteed by FHA,
their own QM definitions, which excluded product features they considered would impede their own QM definitions, which excluded product features they considered would impede
repayment from borrowers they predominantly serve—but they did not limit DTIs to 43%.repayment from borrowers they predominantly serve—but they did not limit DTIs to 43%.
81 Mortgages with DTIs exceeding 43% could still qualify under the Mortgages with DTIs exceeding 43% could still qualify under the
QM patch
required guidelines to verify borrowersrequired guidelines to verify borrowers
above 43% or ineligible for sale to the above 43% or ineligible for sale to the
have restricted credit access.have restricted credit access.
ability to repay their loans—but with DTIs exceeding 43%—experienced reductions in credit ability to repay their loans—but with DTIs exceeding 43%—experienced reductions in credit
access when attempting to refinance, suggesting a lender preference for safe harbor legal access when attempting to refinance, suggesting a lender preference for safe harbor legal
protection. Many originators, also reporting Appendix Q to be unclear and complex in practice, protection. Many originators, also reporting Appendix Q to be unclear and complex in practice,
had limited themselves to making QM loans only to avoid exposure to potential liability and had limited themselves to making QM loans only to avoid exposure to potential liability and
litigation risks.litigation risks.
The CFPB has since amended the QM definitions to possibly achieve a better balance between ensuring consumers' ATR and access to affordable mortgage credit. Using pricing as a proxy for affordability, the CFPB released a final rule in December 2020 with the following revisions to the 2014 final rule86:
- All general QM loans must still meet certain underwriting and product feature requirements as well as limits on points and fees. The 43% DTI ratio requirement, however, was removed and replaced with requirements that are based on the mortgage pricing, which reflects the credit quality of borrowers.
- When a lender issues a general QM, it creates a presumption that the lender has complied with its ATR responsibilities, reducing the lender's legal exposure. The level of protection afforded a lender is linked to the loan's pricing. General QMs with rate spreads—previously defined as the difference between the APR and APOR—that do not exceed 1.5 percentage points (or 3.5 percentage points or more for subordinate-lien mortgages) qualify for safe harbor legal protection.87
- For a rebuttable presumption general QM, the difference between APR and APOR for first-lien mortgages may exceed 1.5 percentage points, but it is limited to 2.25 percentage points under the revised final rule. Under a rebuttable presumption, a borrower can argue that the lender violated the ATR rule if the information presented to the lender during the loan application and origination processes would have indicated that the borrower's residual income was insufficient to meet living expenses after paying the mortgage and other debts.
- The 2020 final rule removed Appendix Q and granted safe harbor to creditors using other verification standards specified by the CFPB.88
- The 2020 final rule increased the loan amount thresholds that the APR could be above the APOR for certain circumstances. For example, the thresholds for first-lien loans with smaller balances and subordinate-liens, which tend to have higher APRs, were increased to be eligible for QM status. A first-lien secured by a manufactured home (as defined under federal regulations that establish construction and safety standards) may also be eligible for QM status.
Despite some support by the mortgage industry for the 2020 amendments,89 the CFPB delayed issue of the final rule until April 30, 2021.90 The CFPB also issued a new "seasoned QM" rule.91 Under this rule, certain non-QM mortgages could become QMs—or certain rebuttable presumption QMs could become safe harbor QMs—after lenders have held them in their own portfolios for a certain amount of time and the loans met certain performance expectations over the period.
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50-Year Mortgages Housing affordability concerns have spurred discussions about 50-year mortgages.92 On the one hand, increasing conventional maturity lengths from 30 to 50 years would reduce borrowers' monthly coupon payments, because principal repayments would occur over a longer period of time. On the other hand, lengthening the principal repayment period increases borrowers' interest expenses and slows the pace of principal reduction. Because the benefits of lower monthly payments may largely be offset by higher interest costs (and considerably slower equity accumulation), the 50-year mortgage may be considered a high-cost financial product. Currently, 50-year mortgages would also be ineligible for QM status given that the maturity length exceeds 30 years. Although a 50-year mortgage may be considered a high-cost mortgage (relative to a 30-year mortgage) when all payments are made as scheduled, most borrowers tend to prepay early, typically within 10-12 years after origination. For this reason, borrowers with 50-year mortgages may pay similar or perhaps lower amounts of interest relative to those with 30-year mortgages over a 10-12-year holding period. Thus, obtaining a 50-year mortgage with the intention of terminating the mortgage early may enhance housing affordability, though it may not advance principal repayment or wealth accumulation. |
Footnotes
A single-family mortgage is a loan secured (i.e., collateralized) by a residential dwelling having at least one and no more than four separate units.
In this report, the terms loan originator and lender may be used interchangeably. However, loan originators, also known as mortgage brokers, interact directly with applicants and facilitate the mortgage transactions to consummation. By comparison, a lender raises the funds used to make the loan and retains at least one of the embedded mortgage risks (i.e., prepayment, default), discussed in more detail in the next section. A lender may also originate mortgages or outsource this task to a third-party originator. The distinction between lender and loan originator can be important in certain legal and regulatory contexts. For more information, see the description of the "true lender" doctrine in CRS Report R45081, Banking Law: An Overview of Federal Preemption in the Dual Banking System, by Jay B. Sykes.
For more detailed information about the primary market and mortgage characteristics, see CRS Report R42995, An Overview of the Housing Finance System in the United States, by Katie Jones, Darryl E. Getter, and Andrew P. Scott.
See Neil Bhutta and Aurel Hizmo, "Do Minorities Pay More for Mortgages?," Review of Financial Studies, vol. 34, no. 2 (February 2021), pp. 763-789; and Robert B. Avery et al., "Higher-Priced Home Lending and the 2006 HMDA Data," Federal Reserve Bulletin, September 2006.
Predatory loans have provisions that are not financially beneficial to borrowers. However, while excessively high fees or interest rates may be attributes of predatory loans, not all loans with high interest rates and fees are predatory. Some borrowers with poor credit histories may have to accept high rates if they wish to borrow from any lender. For more on the complications of defining predatory lending, see James H. Carr and Lopa Kolluri, Predatory Lending: An Overview, Fannie Mae Foundation, 2001.
A cost-burdened household is one with a monthly housing cost—either to own or rent—that exceeds 30% of its monthly income. See Department of Housing and Urban Development (HUD), "CHAS (Comprehensive Housing Affordability Strategy): Background," https://www.huduser.gov/portal/datasets/cp/CHAS/bg_chas.html.
TILA is contained in Title I of the Consumer Credit Protection Act, P.L. 90-301, 81 Stat. 146, as amended by 15 U.S.C. §§1601 et seq. The Federal Reserve Board implements TILA through Regulation Z.
P.L. 93-533, 88 Stat. 1724, 12 U.S.C. §§2601-2617.
P.L. 94-200, 12 U.S.C. §§2801-2809.
The Equal Credit Opportunity Act of 1974 (P.L. 94-239) prohibits creditors from discriminating against applicants on the basis of race, color, religion, national origin, sex, marital status, or age or because the applicant receives public assistance.
P.L. 91-508, Title VI, §601, 84 Stat. 1128 (1970), codified as amended at 15 U.S.C. §§1681-1681x. For the legal definition, see 12 C.F.R. §1090.104, "Consumer Reporting Market," https://www.ecfr.gov/current/title-12/chapter-X/part-1090/subpart-B/section-1090.104. The Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Equal Credit Opportunity Act are all consumer credit protection amendments included in the Consumer Credit Protection Act (P.L. 90-321).
A conventional conforming mortgage is one that meets the eligibility criteria set by Fannie Mae and Freddie Mac, including the dollar limits set annually by the Federal Housing Finance Agency.
See William R. Emmons, "Why Haven't Mortgage Rates Fallen Further?," Federal Reserve Bank of St. Louis, June 15, 2020, https://www.stlouisfed.org/on-the-economy/2020/june/why-havent-mortgage-rates-fallen-further.
Mortgage insurance is usually required for borrowers lacking either a down payment or home equity that equals at least 20% of the property value. If a borrower defaults on a mortgage obligation, mortgage insurance reimburses the lender for the loss. The Federal Housing Administration and the VA are federal agencies that provide mortgage insurance. However, borrowers may get private mortgage insurance, which may be less expensive for more creditworthy borrowers. Default risk premiums frequently have an upfront component, paid in a lump sum when the loan is closed, and an ongoing component, collected over the life of the loans. The ongoing component of the default fee typically manifests itself as an increase in the mortgage coupon. The upfront component of the default fee typically appears as part of the closing costs.
See CRS Report R44125, Consumer and Credit Reporting, Scoring, and Related Policy Issues, by Darryl E. Getter.
Lenders can assess the financial risks of prospective borrowers faster and subsequently offer competitively priced mortgage loans that factor in the associated risk probabilities. See Board of Governors of the Federal Reserve System, Report to Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit, submitted to the Congress pursuant to Section 215 of the Fair and Accurate Credit Transactions Act of 2003, August 2007, https://www.federalreserve.gov/boarddocs/rptcongress/creditscore/introduction.htm.
For more information about mortgage servicing, see CRS Report R48713, Mortgage Servicing and Selected Policy Issues, by Darryl E. Getter.
See Karan Kaul et al., "Options for Reforming the Mortgage Servicing Compensation Model," Urban Institute, April 19, 2019, https://www.urban.org/sites/default/files/publication/100131/options_for_reforming_the_mortgage_servicing_compensation_model_0.pdf.
See Board of Governors of the Federal Reserve System, "Determination of Finance Charge and APR," in Regulation Z: Truth in Lending, http://www.federalreserve.gov/boarddocs/caletters/2008/0805/08-05_attachment1.pdf.
For example, Fannie Mae has a required net/commitment yield, which does not include a servicing fee and is used as a minimum base yield. Originators deliver mortgages to Fannie Me after the relevant loan-level price adjustments have been applied to the commitment yields. On June 3, 2024, Fannie Mae discontinued posting the required net yield. See Fannie Mae, "Required Net Yield Retirement Overview," https://singlefamily.fanniemae.com/media/37336/display.
Some lenders establish base coupons representative of the risk linked to the average prime credit, owner-occupied borrowers. Consequently, any additional loan-level price adjustments represent pricing for riskier, non-prime loans.
See CRS In Focus IF11715, Introduction to Financial Services: The Housing Finance System, by Darryl E. Getter.
Fannie Mae and Freddie Mac have also implemented nationwide standardization of mortgage products and borrower underwriting criteria, which enhances the transparency of the underlying credit risk of mortgage borrowers and increases the attractiveness of trading mortgage default risk. For more information, see CRS Report R46746, Fannie Mae and Freddie Mac: Recent Administrative Developments, by Darryl E. Getter.
Prior to their conservatorship, Fannie Mae and Freddie Mac could actively trade their own MBSs in the over-the-counter bond market to abate rising liquidity premiums. For more information, see CRS Report R46746, Fannie Mae and Freddie Mac: Recent Administrative Developments, by Darryl E. Getter.
See Nina Boyarchenko et al., Understanding Mortgage Spreads, Federal Reserve Bank of New York, April 2015, https://www.frbsf.org/economic-research/files/S03_P2_AndreasFuster.pdf.
If more liquid investment alternatives exist, then investors would be able to pass more of the liquidity premium onto borrowers who finance their home purchases with mortgages. For more information, see Jodi Beggs, "Elasticity and Tax Burden," ThoughtCo, March 5, 2019, https://www.thoughtco.com/elasticity-and-tax-incidence-1147952.
See Owen A. Lamont and Richard H. Thaler, "The Law of One Price in Financial Markets," Journal of Economic Perspectives, vol. 17, no. 4 (Fall 2003), pp. 191-202.
Mortgages, which are eligible for various federal insurance programs or for purchase by the Enterprises, must satisfy national underwriting standards and, therefore, exhibit less price variability given that the underlying borrowers have similar financial characteristics (e.g., prepayment and default risk propensities).
Darryl E. Getter, "Consumer Credit Risk and Pricing," Journal of Consumer Affairs, vol. 40, no. 1 (Summer 2006), pp. 41-63.
Regulation Z requires lenders to assume that the interest rate situation at the time of origination will continue for the term of the loan when calculating the APR for adjustable rate loans.
P.L. 111-203, §1098, 12 U.S.C §2603.
CFPB, "Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z)," 78 Federal Register 79730, December 31, 2013.
See CFPB, "Executive Summary of the 2017 TILA-RESPA Rule," July 7, 2017, https://files.consumerfinance.gov/f/documents/201707_cfpb_Executive-summary-of-2017-TILA-RESPA-rule.pdf.
See CFPB, "Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z)," 83 Federal Register 19159-19176, May 2, 2018.
P.L. 94-200, 12 U.S.C. §§2801-2809. For more information, see CFPB, "Home Mortgage Disclosure Act (HMDA) Data Collection: What Is the Purpose?," https://files.consumerfinance.gov/f/documents/cfpb_hmda-data-collection-pia_122017.pdf.
Reference to fair lending laws and regulations typically encompasses enforcement of the Fair Housing Act, which is Title VIII, Section 800, of the Civil Rights Act of 1968 (P.L. 90-284, 82 Stat. 73, 81-89). For more information on fair lending examination procedures as well as definitions of discrimination types, see Office of the Comptroller of the Currency, "Comptroller's Handbook," http://www.occ.treas.gov/handbook/fairlep.pdf.
See CRS Report R48096, Modernization of the Community Reinvestment Act, by Darryl E. Getter.
See Board of Governors of the Federal Reserve System, "Frequently Asked Questions About the New HMDA Data," March 31, 2005, https://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050331/attachment.pdf.
See CRS Report R44125, Consumer and Credit Reporting, Scoring, and Related Policy Issues, by Darryl E. Getter.
See Board of Governors of the Federal Reserve System, Subprime Lending, Predatory Lending, remarks by Governor Edward M. Gramlich, December 6, 2000, https://www.federalreserve.gov/boarddocs/speeches/2000/20001206.htm.
P.L. 107-155, 116 Stat 81.
See Board of Governors of the Federal Reserve System, "Home Mortgage Disclosure," 73 Federal Register 63329-63338, October 24, 2008.
See FDIC, "Home Mortgage Disclosure Act," in Consumer Compliance Examination Manual, December 2024, p. V-9.1, https://www.fdic.gov/resources/supervision-and-examinations/consumer-compliance-examination-manual/documents/5/v-9-1.pdf.
See CFPB, "Home Mortgage Disclosure (Regulation C)," 80 Federal Register 66128-66340, October 28, 2015.
For more information, see CRS In Focus IF13093, Financial Data Transparency Act: Implementation Status of Data Standards and Related Data Collection Issues, by Natalie R. Ortiz, Darryl E. Getter, and Graham C. Tufts.
See Federal Financial Institutions Examination Council, A Guide to HMDA Reporting: Getting It Right!, https://www.ffiec.gov/sites/default/files/data/hmda/2024Guide.pdf.
See FDIC, "Home Mortgage Disclosure Act," in Consumer Compliance Examination Manual. Partial exemptions exist separately for closed-end mortgages and open-end lines of credit, and both operate independently.
See GAO, Home Mortgage Disclosure Act: Reporting Exemptions Had a Minimal Impact on Data Availability, but Additional Information Would Enhance Oversight, GAO-21-350, May 17, 2021, https://www.gao.gov/assets/gao-21-350.pdf.
For more information on the duty-to-serve housing goals for the Enterprises, see CRS Report R46746, Fannie Mae and Freddie Mac: Recent Administrative Developments, by Darryl E. Getter.
See GAO, Home Mortgage Disclosure Act.
For more information, see the definitions used in the following discussions: Alanna McCargo et al., "Small-Dollar Mortgages for Single-Family Residential Properties," Urban Institute, April 2018, https://www.urban.org/sites/default/files/publication/98261/small_dollar_mortgages_for_single_family_residential_properties_2.pdf; Emily Goldstein and Kyle DeMaria, Small-Dollar Mortgage Lending in Pennsylvania, New Jersey, and Delaware, Federal Reserve Bank of Philadelphia, December 2022, https://www.philadelphiafed.org/-/media/frbp/assets/community-development/reports/cdro-small-dollar-mortgage-lending-report.pdf; and Tracy Maguze et al., "Small Mortgages Are Too Hard to Get," Pew Research Center, June 22, 2023, https://www.pew.org/en/research-and-analysis/issue-briefs/2023/06/small-mortgages-are-too-hard-to-get.
See HUD, Office of Policy Development and Research, Financing Lower-Priced Homes: Small Mortgage Loans, October 2022, https://www.govinfo.gov/content/pkg/GOVPUB-HH14-PURL-gpo223060/pdf/GOVPUB-HH14-PURL-gpo223060.pdf.
See CRS Report R48096, Modernization of the Community Reinvestment Act, by Darryl E. Getter.
For more information about the lending strategies of credit unions, see CRS Report R46360, The Credit Union System: Lending Activities and Selected Regulatory Developments, by Darryl E. Getter.
These lenders would still face fair lending examinations by their primary regulators to demonstrate compliance with anti-discrimination and anti-predatory lending laws.
The Enterprises purchase mortgages largely originated for prime borrowers. Since conservatorship, the Federal Housing Finance Agency directed the Enterprises to create MBSs comprised of mortgages offered to borrowers with similar prepayment and default rates. For more information, see CRS Report R46746, Fannie Mae and Freddie Mac: Recent Administrative Developments, by Darryl E. Getter.
In this context, societal costs may be in the form of rising housing costs burdens, which can discourage homeownership or increase the likelihood of mortgage defaults and foreclosures—both outcomes possibly having spillover effects on various housing market values. For discussions regarding the strengths and weaknesses of a Pigouvian tax, see William J. Baumol, "On Taxation and the Control of Externalities," American Economic Review, vol. 62, no. 3 (June 1972), pp. 307-322; Earl A. Thompson and Ronald Batchelder, "On Taxation and the Control of Externalities: Comment," American Economic Review, vol. 64, no. 3 (June 1974), pp. 467-471; and Dennis W. Carlton and Glenn C. Loury, "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," Quarterly Journal of Economics, vol. 95, no. 3 (November 1980), pp. 559-566.
Developing algorithms to price various gradations of higher-risk borrowers (i.e., ordering by descending credit scores) is challenging because default incentives are observed primarily when home values fall far below the outstanding mortgage balance amounts (or other unanticipated sudden adverse events occur). See Richard K. Green and Susan M. Wachter, The Housing Finance Revolution, Federal Reserve Bank of Kansas City, August 2007, pp. 21-67, https://www.kansascityfed.org/documents/3221/pdf-Green_Wachter_0415.pdf; William N. Goetzmann et al., The Subprime Crisis and House Price Appreciation, National Bureau of Economic Research, September 2009, https://www.nber.org/system/files/working_papers/w15334/w15334.pdf; and Amy Crews Cutts and Robert A. Van Order, "On the Economics of Subprime Lending," Journal of Real Estate Finance and Economics, vol. 30, no. 2 (2005), pp. 167-196. In addition, the Federal Reserve issued final rules prohibiting collateral-dependent lending—the practice of lending on current or expected future value of the housing assets, relying upon proceeds from home sales to repay any defaulted mortgages—rather than the incomes and savings of higher-risk borrowers. See Board of Governors of the Federal Reserve System, "Board Issues Final Rule Amending Home Mortgage Provisions of Regulation Z (Truth in Lending)," press release, June 14, 2008, http://www.federalreserve.gov/newsevents/press/bcreg/20080714a.htm.
See Konstantinos Tzioumis, "Detecting Discrimination: A Dynamic Perspective," Journal of the Royal Statistical Society Series A, vol. 179, no. 1 (January 2016), pp. 133-152; and Anthony M. Yeazer, A Review of Statistical Problems in the Measurement of Mortgage Market Discrimination and Credit Risk, Research Institute for Housing America, September 2010.
For more information on enhanced damages for HOEPA violations, see Jeffrey P. Bloch, Senior Regulatory Counsel, Consumer Bankers Association, letter to Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, July 22, 2011, https://www.federalreserve.gov/SECRS/2011/August/20110811/R-1417/R-1417_072211_84144_535349935589_1.pdf; and CFPB, "Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)," 78 Federal Register 6408-6620, January 30, 2013. Enhanced damages include actual damages to the borrower, the finance charge (interest basis points and fees) multiplied by two, statutory damages up to $4,000, court costs, and attorney's fees. See Laurie Goodman et al., "The Coming Crisis in Credit Availability," Amherst Mortgage Insight, May 30, 2012, pp. 1-14, https://www.sec.gov/comments/s7-14-11/s71411-363.pdf.
See Board of Governors of the Federal Reserve System, "Truth in Lending," 66 Federal Register 65604-65622, December 20, 2001.
See Federal Reserve, press release, June 21, 2002, https://www.federalreserve.gov/boarddocs/press/bcreg/2002/20020621/default.htm.
See Board of Governors of the Federal Reserve System, "Board Issues Final Rule."
See CFPB, "Summary of the Final Rule to Strengthen Consumer Protections for High-Cost Mortgages," January 10, 2013, https://files.consumerfinance.gov/f/201301_cfpb_high-cost-mortgage-rule_summary.pdf; and CFPB, "High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X)," 78 Federal Register 6856-6975, January 31, 2013.
For 2025, the HOEPA annual threshold for high-cost mortgages is $26,968, and the adjusted points-and-fees dollar trigger for high-cost mortgages is $1,348. See CFPB, "Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages)," 89 Federal Register 95080-95082, December 2, 2024.
In 2005, 10 lenders accounted for 70% of all HOEPA-reported loan originations, and 730 institutions reported making only one or two HOEPA loans. For more information, see Robert B. Avery et al., "Higher-Priced Home Lending and the 2005 HMDA Data," Federal Reserve, September 8, 2006, https://www.federalreserve.gov/pubs/bulletin/2006/hmda/bull06hmda.pdf.
See CFPB, "Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)," 78 Federal Register 6408-6620, January 30, 2013.
See CFPB, "Ability-to-Repay and Qualified Mortgage Standards."
For more detailed comparisons concerning how lenders can comply with the ATR requirements, see CFPB, "General Comparison of Ability-to-Repay Requirements with Qualified Mortgages," https://files.consumerfinance.gov/f/documents/201603_cfpb_atr-and-qm-comparison-chart.pdf.
The QM rule may be considered a macroprudential policy tool that may reduce a financial system's vulnerability to payment disruptions and systemic panics. Public credit guarantees (e.g., federal mortgage insurance) and credit-based tools such as caps on loan-to-value ratios and margins are examples of macroprudential tools available for governments to promote financial stability. See Tobias Adrian et al., Macroprudential Policy: Case Study from a Tabletop Exercise, Federal Reserve Bank of Boston, December 2015 (revised), https://www.bostonfed.org/publications/risk-and-policy-analysis/2015/macroprudential-policy-case-study-from-a-tabletop-exercise.aspx.
See HUD, "Qualified Mortgage Definition for HUD Insured and Guaranteed Single Family Mortgages," 78 Federal Register 75215-75238, December 13, 2013; VA, "Loan Guaranty: Ability-to-Repay Standards and Qualified Mortgage Definition Under the Truth in Lending Act," 79 Federal Register 26620-26628, May 9, 2014; and USDA, Rural Housing Service, "Single Family Housing Guaranteed Loan Program," 81 Federal Register 26461-26465, May 3, 2016.
2000640-Has-the-QM-Rule-Made-It-Harder-to-Get-a-Mortgage.pdf; and 2000640-Has-the-QM-Rule-Made-It-Harder-to-Get-a-Mortgage.pdf; and Karan Kaul and Kaul and Laurie Goodman, Goodman, "What, If Anything,
See CFPB, Ability-to-Repay and Qualified Mortgage Rule Assessment Report, January 2019, https://files.consumerfinance.gov/f/documents/cfpb_ability-to-repay-qualified-mortgage_assessment-report.pdf.
The few originators that offer non-QM loans charge higher rates to offset potential legal and compliance risks, even if the underlying credit risk is relatively low. As a result, some categories of creditworthy borrowers that should qualify for QMs have trouble accessing safe, sustainable, and affordable mortgage credit. See Kaul and Goodman, "What, If Anything, Should Replace the QM GSE Patch?"
For a discussion on the regressivity of a Pigouvian tax, see Benjamin B. Lockwood and Dmitry Taubinsky, Regressive Sin Taxes, National Bureau of Economic Research, March 2017, https://www.nber.org/system/files/working_papers/w23085/w23085.pdf.
See CFPB, "Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): General QM Loan Definition," 85 Federal Register 86308-86400, December 29, 2020.
The verification standards include relevant provisions from Fannie Mae's Single Family Selling Guide, Freddie Mac's Single-Family Seller/Servicer Guide, the FHA's Single Family Housing Policy Handbook, the VA's Lenders' Handbook, and USDA's Field Office Handbook for the Direct Single Family Housing Program and Handbook for the Single Family Guaranteed Loan Program.
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Greg Rosalsky et al., "Is a 50-Year Mortgage Really That Much Crazier Than a 30-Year One?," Plant Money, November 18, 2025, https://www.npr.org/sections/planet-money/2025/11/18/g-s1-98040/is-a-50-year-mortgage-really-that-much-crazier-than-a-30-year-one.