National Community Reinvestment Coalition • http://www.ncrc.org • 202-628-8866
This analysis also reveals that foreclosure rates do not differ substantially between the proposed QRMdefinition and the alternative definitions. In 2006, for example, QRM loans had a foreclosure rate of .14percent, but when relaxing the QRM definition and allowing down payments as low as 3 percent, theforeclosure rate only inches up to .24 percent.Under the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA), racial disparities inlending can only be justified by a business necessity. The NCRC analysis finds that the proposed QRMdefinition creates racial disparities that are not justified by business necessity, especially since the restrictionsdo no significantly reduce risk. The proposed QRM definition enshrines in law a separate and unequalstandard that is inconsistent with fair lending laws.The years in the NCRC analysis were among the worst years in terms of lending standards. The finding thatforeclosure rates do not differ significantly when relaxing the QRM definition during the worst years impliesthat relaxing the QRM definition in years in which prudent practices were more prevalent would have evenless impact on the foreclosure rates. The NCRC analysis is not intended to imply that NCRC favors any of thealternative QRM definitions tested, but to suggest that the agencies should evaluate their proposal with regardto its fair lending impact, and that insignificant differences in risk should disqualify restrictions that cut off theopportunity to access home financing.
NCRC QRM and Fair Lending Analysis
Description of LPS Database
NCRC used Lender Processing Services (LPS) data for this analysis of the impact of the proposed QRM rule.The LPS data is compiled from mortgage servicing firms that collect mortgage payments for U.S. investors andlenders. As of December 2008, a total of sixteen firms, including nine of the top ten servicers, provided data toLPS. A loan stays in the LPS data set until it completes a real-estate-owned (REO) process or is repaid. Thedata provides information about the terms of the loan at origination, property value, borrower credit score, andthe loan’s performance over time—information that is not available in the Home Mortgage Disclosure Act(HMDA) data set. Unlike HMDA data, however, LPS does not have borrower demographic information butdoes have the zip codes for the loans. We were able to determine the minority composition of the zip codes for the analysis below. NCRC does not use HMDA data for this analysis because a key objective was to assess theforeclosure rates of various definitions of loans. We are comparing the LPS data to HMDA so the reader knows why our analysis is looking at neighborhoods, not individual borrowers.
Structure of Tables and Charts
Tables 1 through 6 show the impact of the proposed QRM rule on the number and percentages of mortgagesqualifying as QRM. We also assess the impacts of four alternatives to QRM. The legend immediately belowdescribes the alternatives and how QRM down payment, loan-to-value ratios, and front-end DTI were relaxed(we only had information for the front-end or housing payment to monthly income in the LPS database).Table 7 is a more detailed legend and describes specifications for the QRM and the alternatives. Table 8compares the LPS sample to HMDA for 2006 and 2007; LPS does not capture the all of the institutions thatreport HMDA data, meaning that LPS has a smaller number of loans. Tables 9 through 26 repeat this analysisfor home purchase, rate- and term-refinance loans, and cash-out refinance loans for 2006 and 2007.Note: Loans in foreclosure process (‘presale’ or ‘post-sale’) or is already a real estate owned (REO) propertyare considered to be in foreclosure in this study. We looked at loans originated in 2007 and 2006 separatelyand looked at their performance through 2008.