Fitch: Ability-to-Repay Borrower Claims ‘Nonexistent’

Two years after introduction of the Consumer Financial Protection Bureau’s Ability-to-Pay rule, major residential mortgage servicers have yet to see any borrower claims, said Fitch Ratings, New York.

However, Fitch said that could change over time with certain non-Qualified Mortgage loans becoming more commonplace.

The ATR rule came into effect for applications on Jan. 10, 2014 to provide borrowers with greater protection from harmful lending practices. Under the rule, mortgage lenders must make a reasonable effort to determine if a borrower has the ability to repay the mortgage before the loan is made. ATR mandates a repayment analysis for closed-end mortgage loans and prohibits certain loan terms and conditions.

Fitch Managing Director Roelof Slump said the lack of borrower claims to date is not unexpected, noting that most loans, including all Fannie Mae/Freddie Mac-eligible loans, meet the definition of QM and receive safe harbor protection from the ATR rule.

In the non-agency sector, Slump said, few non-QM loans have been securitized to date. Of the more than 10,000 loans included in Fitch-rated newly originated mortgage pools since the start of 2014, only 14 have been classified as non-QM and are thus vulnerable to ATR claims.

“Of the small fraction of loans not eligible for safe harbor, the combination of tight underwriting and a supportive economic environment has kept default rates low,” Slump said.

Fitch said in newly originated Fitch-rated mortgage pools issued since the start of 2014, only three loans are currently more than 60 days delinquent, none non-QM. “Anecdotally, Fitch has been told default rates on non-QM loans that have not been securitized have been very low as well,” Slump said.

Fitch said because it expects ATR claims to generally only occur after a default, lower credit quality or non-appendix Q non-QM loans having a higher default risk may have a higher probability of a successful claim. Fitch is likely to apply increased loss expectations for these loans. Non-QM origination volume for these products, while still limited today, appears to be growing and could become more common in the future.