A Brief Overview of H.R. 1210, the Portfolio Lending and Mortgage Access Act
November 16, 2015
A Brief Overview of H.R. 1210, the Portfolio Lending and
Mortgage Access Act
H.R. 1210, the Portfolio Lending and Mortgage Access Act,
of QM, which provide lenders the same presumption of
was ordered to be reported by the House Committee on
compliance with the ATR requirement as a Standard QM.
Financial Services. It would, among other things, attempt to
One of these additional categories is referred to as the Small
increase the credit available to consumers and reduce the
Creditor Portfolio QM, which is similar to the QM that
regulatory burden on lenders by establishing a new
would be created by H.R. 1210 (described in more detail
Qualified Mortgage (QM) category for certain mortgages
below). Compared to the Standard QM, the Small Creditor
held in portfolio by the originating lender.
Portfolio QM has less prescriptive underwriting
requirements and is intended to reduce the regulatory
Ability-to-Repay Rule and Qualified
burden of the ATR requirement for certain small lenders.
Mortgages
Title XIV of the Dodd-Frank Act established the ability-to-
Small Creditor Portfolio Qualified
repay (ATR) requirement. Under the ATR requirement, a
Mortgages
lender must determine based on documented and verified
A mortgage can qualify as a Small Creditor Portfolio QM if
information that, at the time a mortgage loan is made, the
three broad sets of criteria are satisfied. First, the loan must
borrower has the ability to repay the loan. A lender must
be held in the originating lender’s portfolio for at least three
consider and verify certain types of information prior to
years (subject to several exceptions). Second, the loan must
originating a loan, including the applicant’s income or
be held by a “small creditor,” which is defined as a lender
assets, credit history, outstanding debts, and other criteria.
who originated 2,000 or fewer mortgages in the previous
Lenders that fail to comply with the ATR rule could be
year and has less than $2 billion in assets. Third, the loan
subject to legal liability, such as the payment of certain
must meet the underwriting and product-feature
statutory damages.
requirements for a Standard QM except for the debt-to-
income ratio.
A lender can comply with the ATR requirement in different
ways, one of which is by originating a Qualified Mortgage
(QM). When a lender originates a QM, then it is presumed
At issue in H.R. 1210 – Should the Small Creditor
to have complied with the ATR requirement, which
Portfolio QM be expanded?
consequently reduces the lender’s potential legal liability of
its residential mortgage lending activities. The definition of
a QM, therefore, is important to a lender seeking to
minimize its legal risk of its residential mortgage lending
While the Small Creditor Portfolio QM has less prescriptive
activities, specifically its compliance with the statutory
underwriting requirements than the Standard QM, the Small
ATR requirement. Some are concerned that, at least in the
Creditor Portfolio QM requires a lender to hold the loan in
short term, few mortgages will be originated that do not
portfolio and limits it to small lenders. The CFPB justified
meet the QM standards due to the legal protections that
establishing the Small Creditor Portfolio QM on the basis
QMs afford lenders, even though there are other means of
that even though the underwriting standards have been
complying with the ATR requirement.
reduced (potentially making it easier for some borrowers to
qualify), certain factors unique to portfolio loans and to
The liability and the minimum underwriting standards
small lenders provide added incentives that ensure that a
enacted as part of the Dodd-Frank Act are intended to
lender utilizing the Small Creditor Portfolio QM will
address market failures that some policymakers believed
accurately assess whether a borrower can repay the
fueled the housing bubble that precipitated the financial
mortgage. The CFPB believes both the portfolio
crisis. Some argue that they have led to an unnecessary
requirement and small lender limitation are necessary to
constriction of credit and have been unduly burdensome on
justify the less prescriptive underwriting standards. For
lenders.
example, the CFPB argues that small lenders are more
likely than large banks to use a relationship-based lending
The Dodd-Frank Act provides a general definition of a QM,
model (which involves developing close familiarity with
but also authorizes the Consumer Financial Protection
their respective customer bases) that may yield a more
Bureau (CFPB) to issue “regulations that revise, add to, or
accurate assessment of the borrower.
subtract from” the general statutory definition. The CFPB-
issued QM regulations establish a “Standard QM” that
Proposed Changes to the QM Rule
meets all of the underwriting and product feature
Some in Congress believe the Small Creditor Portfolio QM
requirements outlined in the Dodd-Frank Act. However, the
is too narrow and should be expanded to provide more
QM regulations also establish several additional categories
relief to lenders and more credit to potential borrowers.
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A Brief Overview of H.R. 1210, the Portfolio Lending and Mortgage Access Act
H.R. 1210 would establish an additional portfolio QM
Creditor Portfolio QM are essential to ensuring that a lender
option that, in comparison to the Small Creditor Portfolio
will verify a borrower’s ability to repay, and instead argue
QM (see Table 1), would be available to a larger pool of
that holding the loan in portfolio is sufficient to encourage
lenders and impose less prescriptive underwriting and
thorough underwriting. By keeping the loan in portfolio,
product-feature requirements, but require more stringent
lenders have added incentive to consider whether the
portfolio guidelines.
borrower will be able to repay the loan. Keeping the loan in
portfolio means that the lender retains the default risk and
Under H.R. 1210, a mortgage would receive QM status if:
could be exposed to losses if the borrower does not repay.
This retained risk, the argument goes, would encourage
it is retained in portfolio by the originating institution
small creditors to provide additional scrutiny during the
for the life of the loan (with some limited exceptions);
underwriting process, even in the absence of a legal
requirement to do so. The expanded portfolio option would,
it is originated by any lender regardless of size that is a
according to supporters, spur lenders to offer more
depository institution (a financial institution that accepts
mortgages and it would reduce the burden associated with
deposits); and
the more prescriptive underwriting standards of the existing
QM options. The less prescriptive standards could most
it satisfies certain limitations on prepayment penalties.
benefit creditworthy borrowers with atypical financial
situations, such as self-employed individuals or seasonal
Table 1. Comparison of the Small Creditor Portfolio
employees, who may have a difficult time conforming to
QM and H.R. 1210
the existing standards.
CFPB’s Small
Not all mortgages held in portfolio, however, have
Creditor
performed well, which is a concern to be considered in
Portfolio QM
H.R. 1210
evaluating the modifications proposed in H.R. 1210.
Portfolio
Mortgage must
Mortgage would
Research from the Federal Reserve Bank of Dallas,
Requirements
be held in
have to be held in
presented in Figure 1, shows the delinquency rate of
portfolio for
the portfolio of
mortgages held in portfolio by banks of different sizes in
three years. It
the originating
the aftermath of the bursting of the housing bubble. Banks
may be
institution for the
of all sizes had similar delinquency rates at the beginning of
transferred to
life of the loan,
2008, but the rates diverged over the next four years. The
another small
with some limited
larger banks experienced higher delinquency rates on
lender and retain
exceptions.
mortgages held in portfolio, while smaller banks saw less of
QM status.
an increase. Performance during the most recent crisis,
however, may not be indicative of future performance.
Lender
Limited to small
Any depository
Restrictions
lenders, those
institution.
Figure 1. Delinquency Rates for Mortgages Held In
with less than $2
Portfolio by Banks of Different Sizes
billion in assets
and fewer than
2,000
originations
(excluding those
held in portfolio).
Loan Criteria
Loan must satisfy
Loan must
the underwriting
comply with
and product-
certain limitations
feature
on prepayment
requirements of
penalties.
the Standard QM
Option, with the
exception of the
Standard QM
Source: Federal Reserve Bank of Dallas.
Option’s DTI
requirement.
Source: Table created by CRS.
Sean M. Hoskins, Analyst in Financial Economics
Supporters of H.R. 1210 generally argue that not all of the
IF10321
lender and underwriting requirements included in the Small
https://crsreports.congress.gov
A Brief Overview of H.R. 1210, the Portfolio Lending and Mortgage Access Act
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