TILA was designed to provide  consumers with accurate information about the cost of credit. The Dodd-Frank Act expands the definition of high-cost loans  to include mortgages for purchasing a home; reduces the APR and points  and fees triggers; and requires mandatory preloan counseling for  borrowers of high-cost mortgages, among other things. The Dodd-Frank Act requires securitizers of RMBS to retain no less than 5  percent of the credit risk of any residential mortgage they securitize that  does not meet specified criteria. The report  noted that the effects of a final set of risk retention requirements could not  be analyzed because implementing regulations were still being  developed. Although Most Recent Mortgages Would Likely Have Met Certain Qualified Mortgage Criteria, the Criteria Could Limit Mortgage Options for Some Borrowers

Our analysis of the QM criteria specified in the Dodd-Frank Act generally  indicated that, for each year from 2001 through 2010, most mortgages  would likely have met the individual criteria for which relevant data were  available. The extent to which mortgages met individual criteria varied  by mortgage category and origination year, reflecting changes in the  mortgage market over the 10-year period. The Federal  Reserve Board issued proposed QM rules in April 2011, and is accepting  public comments through July 22, 2011. Consumer and Industry Groups Cited Consumer Protection Benefits of the Qualified Mortgage Criteria but also Raised Some Concerns

Representatives from some consumer groups and the mortgage industry  we spoke with stated that they were generally supportive of certain QM  criteria in the Dodd-Frank Act because the criteria were associated with a  borrower’s ability to repay a mortgage. Many industry stakeholders and consumer groups noted that the  implications of such a requirement would depend on a variety of  regulatory decisions and potential changes in the mortgage market. These include decisions on the characteristics of QRMs that would be  exempt from the risk retention requirement, the forms of risk retention that  would be allowed, the percentage that securitizers would be required to  hold, and risk-sharing arrangements between securitizers and lenders. These factors could affect the availability and cost of mortgage credit and  the future viability of the private-label RMBS market. Some market  participants and the rulemaking agencies noted that risk retention may  complement other securitization and mortgage reforms, such as those  that promote greater transparency and enforcement of loan underwriting  standards. Rulemaking agencies are  accepting public comments on proposed risk retention regulations  through August 1, 2011. Findings from the limited research available on  housing counseling are mixed, with some studies suggesting that some  types of counseling can improve mortgage outcomes and others finding  no effect. HUD Is Creating a New Office for Its Housing Counseling Activities, but Funding Is Uncertain

To enhance consumer protections for homebuyers and tenants, the  Dodd-Frank Act requires HUD to establish an Office of Housing  Counseling. Because of the associated penalties and liabilities, lenders have generally  avoided making high-cost loans, and the secondary market for these  loans has been negligible. Additional information would be needed to  assess the extent to which the new definition would affect mortgages  currently available to consumers. In its written comments, NCUA indicated, as we do, that the impact of the  Dodd-Frank Act would depend on regulatory decisions that had yet to be  made. Key contributors to this report are listed in appendix IV. Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) assess the proportions of mortgages originated  from 2001 through 2010 that would have met selected qualified mortgage  (QM) criteria specified in the Dodd-Frank Wall Street Reform and  Consumer Protection (Dodd-Frank Act) and describes the views of  mortgage industry stakeholders on the potential effects of the QM criteria  on the mortgage market, (2) discuss relevant information and the views of  mortgage industry stakeholder on the potential impact of a risk retention  requirement on the mortgage market and discuss the advantages and  disadvantages of a uniform risk retention requirement, and (3) describe  what research and the views of mortgage industry stakeholders suggest  about the potential impact of provisions in the Dodd-Frank Act regarding  homeownership counseling and changes to the Home Ownership Equity  Protection Act (HOEPA). Abt Associates for the U.S.  Department of Housing and Urban Development.
Why GAO Did This Study

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) is intended, among other things, to reform residential mortgage lending and securitization practices that contributed to the recent financial crisis. The act provides some liability protection for lenders originating mortgages that meet nine specified criteria, as applicable, associated with a borrower's ability to repay ("qualified mortgages"). The act also requires securitizers of mortgages not meeting separate criteria associated with lower default risk to retain at least 5 percent of the credit risk, though federal rulemaking agencies may vary this amount. The act directed GAO to assess the effect of mortgage-related provisions on the availability and affordability of mortgage credit and to issue a report by July 2011, but federal agencies are still developing implementing regulations. This report discusses the potential impact of the act's (1) qualified mortgage criteria, (2) credit risk retention requirement, and (3) provisions concerning homeownership counseling and regulation of high-cost loans.

What GAO Found

GAO examined five of the nine qualified mortgage criteria specified in the Dodd- Frank Act for which sufficient data were available and generally found that, for each year from 2001 through 2010, most mortgages would likely have met the individual criteria. The five criteria address payment of loan principal, length of the mortgage term, scheduled lump-sum payments, documentation of borrower resources, and borrower debt burden. The extent to which mortgages met the individual criteria varied by year of origination, reflecting changes in the mortgage market over the 10-year period. However, the impact of the full set of qualified mortgage criteria is uncertain, partly because data limitations make analysis of the other four criteria difficult and partly because federal agencies could establish different criteria as they develop final regulations. Consumer and industry groups indicated that the criteria specified in the act would likely encourage sound underwriting but could also restrict the availability of and raise the cost of mortgage credit for some homebuyers. Provisions in the act and proposed regulations attempt to address some of these issues, in part by providing exemptions for certain loan products in certain locales, such as rural areas. The public comment period for these proposed regulations ends on July 22, 2011. Mortgage industry stakeholders GAO spoke with indicated that the implications of a risk retention requirement would depend on a variety of regulatory decisions and potential changes in the mortgage market. Rulemaking agencies are accepting public comments on proposed risk retention regulations through August 1, 2011. Key decisions that have yet to be made concern the characteristics of mortgages that would be exempt from risk retention, the forms of risk retention that would be allowed, the percentage that securitizers would be required to hold, and risk-sharing arrangements between lenders and securitizers. These factors could affect the availability and cost of mortgage credit and the viability of a private mortgage securitization market. Additionally, risk retention could complement other securitization and mortgage reforms, such as those that promote greater transparency and enforcement of loan underwriting standards. Other provisions in the Dodd-Frank Act concerning homeownership counseling and regulation of high-cost loans could enhance consumer protections and improve mortgage outcomes for some borrowers, but their specific impacts are difficult to assess at this time. The act authorized a new Office of Housing Counseling within the Department of Housing and Urban Development, but the office is still in the planning stage. Findings from the limited research on housing counseling for mortgage borrowers are mixed, with some studies suggesting that some types of counseling can improve mortgage outcomes and others finding no effect. The act also expands the definition of "high-cost loans," which have disclosures and restrictions designed to protect consumers. Although lenders have generally avoided making these loans, additional information on mortgage costs would be needed to assess the extent to which the new definition would affect mortgages that may be made in the future. To do this work, GAO analyzed a proprietary database of residential mortgages, reviewed relevant housing and mortgage market research, and interviewed key mortgage industry stakeholders. GAO provided a draft of this report to eight agencies. In a letter, the National Credit Union Administration said, as noted in the report, that the act's impact would depend on regulatory decisions that had yet to be made. Six other agencies provided technical comments that have been incorporated as appropriate.