Among other things, they argue that the Small Creditor Portfolio QM, a compliance option under the rule that is intended to benefit small creditors that keep loans in portfolio, should be broadened. They propose modifying the rule to make it easier for a lender to comply if it keeps the loan instead of selling it to another institution. Supporters of expanded portfolio lending proposals argue that because the lender is holding the loan in its portfolio, it is exposed to the risks associated with the loan (such as the risk that the lender will not be repaid) and therefore has the incentive to ensure that the loan is safely underwritten. Critics of the expanded portfolio lending proposals argue that the incentives of holding the loan in portfolio are insufficient to protect consumers and that the existing protections in the rule are essential to ensuring that the failures of the past are not repeated. This report will briefly explain the ATR rule and will analyze the policy debate related to portfolio lending and qualified mortgages. Overview of the Ability-to-Repay and Qualified Mortgage Rule

Title XIV of the Dodd-Frank Act established the ATR requirement. Under the ATR requirement, a lender must determine based on documented and verified information that, at the time a mortgage loan is made, the borrower has the ability to repay the loan. Lenders that fail to comply could be subject to legal liability, such as the payment of certain statutory damages. Under the Consumer Financial Protection Bureau (CFPB) rule implementing the ATR requirement, a lender can comply with the ATR requirement in two ways. Second, a lender could originate a mortgage that satisfies the more prescriptive standards of the QM rule. When a lender originates a mortgage that receives QM status, it is presumed to have complied with the ATR requirement, which consequently reduces the lender's potential legal liability of its residential mortgage lending activities. S. 1484 , the Financial Regulatory Improvement Act of 2015, was reported by the Senate Banking Committee on June 2, 2015. H.R. They differ, however, in whether the mortgage retains its QM status if it is transferred from the originating lender's portfolio and whether the mortgage must be in a lender's portfolio (either the originator's or any lender's portfolio) indefinitely or for a limited period of time. The CFPB limited the portfolio QM option to portfolio loans held by small lenders rather than to all portfolio loans because it 
believes that small creditors are a unique and important source of non-conforming mortgage credit and mortgage credit in rural areas for which there is no readily available replacement, that small creditors may be particularly burdened by the litigation risk associated with the ability-to-repay rules and are particularly likely to reduce or cease mortgage lending if subjected to these rules without accommodation, and that small creditors have both strong incentives and particular ability to make these loans in a way that ensures that consumers are able to repay that may not be present for larger creditors. Several policy issues related to lender restrictions are discussed below. H.R. Supporters disagree, however, with how much discretion the lender should be given. An expanded portfolio QM option may have a greater effect on credit availability at that time. Although the effect on credit availability may be minimal, an expanded portfolio QM option that has less prescriptive underwriting standards could have a greater impact on regulatory burden. The possibility of collateral dependent lending and other factors could result in a lender keeping mortgages in portfolio that may be profitable but not prudently underwritten. S. 1491 is the most similar to the Small Creditor Portfolio QM in that it would require similar loan criteria to be followed for a mortgage to qualify for the expanded QM but it would allow larger lenders to be eligible.
Title XIV of the Dodd-Frank Act established the ability-to-repay (ATR) requirement. Under the ATR requirement, a lender must determine based on documented and verified information that, at the time a mortgage is made, the borrower has the ability to repay the loan. Lenders that fail to comply with the ATR rule could be subject to legal liability, such as the payment of certain statutory damages.
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, it is presumed to have complied with the ATR requirement, which consequently reduces the lender's potential legal liability for its residential mortgage lending activities.
The QM rule has several compliance options that a lender can use to have a mortgage that it originates receive QM status, one of which is the Small Creditor Portfolio QM. Critics of the QM rule argue that the Small Creditor Portfolio QM, which is intended to benefit small creditors that keep loans in portfolio, should be broadened. They propose modifying the rule to make it easier for a lender to comply if it keeps the loan instead of selling it.
Proponents of an expanded portfolio QM disagree on several policy issues, but, in general, they argue that because the lender is holding the loan in its portfolio, it is exposed to the risks associated with the loan (such as the risk that the lender will not be repaid) and therefore has the incentive to ensure that the loan is safely underwritten. The lender, the argument goes, should be allowed to follow less prescriptive underwriting criteria when the mortgage is held in portfolio, and more lenders should be allowed to avail themselves of this option than is currently allowed. Critics of the expanded portfolio lending proposals counter that the incentives of holding the loan in portfolio are insufficient to protect consumers and that the existing protections in the rule are needed to ensure that the failures of the past are not repeated.
This report analyzes the policy debate related to portfolio lending and qualified mortgages, focusing on the legislation that is the subject of congressional debate: H.R. 1210, the Portfolio Lending and Mortgage Access Act; S. 1484, the Financial Regulatory Improvement Act; and S. 1491/H.R. 2642, the Community Lender Regulatory Relief and Consumer Protection Act.
The analysis in this report raises several issues:
Economic theory supports different arguments that are made about whether a mortgage that is kept in portfolio is more or less likely to be prudently underwritten. The retained risk associated with keeping a mortgage in portfolio may provide the lender an incentive to ensure that the borrower is creditworthy, but increasing home prices and issues related to the arbitrage of capital requirements may provide incentives to keep mortgages in portfolio that may be profitable but not prudently underwritten. Empirical research has also led to conflicting results. The Consumer Financial Protection Bureau argues that small creditors may have "strong incentives and particular ability" to make mortgages that accurately assess a borrower's ability to repay that larger lenders may not have. It is unclear, however, what the appropriate size thresholds should be and whether other factors, such as keeping the mortgage in portfolio, can compensate for a larger lender's possibly reduced incentives and ability. It is unclear how significant an effect an expanded portfolio QM option would have on credit availability, as the mortgages that would qualify for the expanded option may already receive QM status under existing options. The legislative proposals may, however, have a greater effect on reducing a creditor's regulatory burden, as the lender may be able to use less cost-intensive underwriting processes of the expanded QM option. Although the burden may be reduced for the lender, it could be borne by consumers if they have fewer consumer protections under an expanded portfolio QM.