QM-Only Policy: Smart Strategy or No?
In response to the new mortgage regulations, is your institution considering implementing a "Qualified Mortgage-only" policy and deciding not to offer non- QM mortgage loans under the Ability-to-Repay standard?
There is a lot "buzz" surrounding this issue right now ... it may be a dispute currently raging in your own institution.
At first glance, the case for "QM-only" is easy to make. Creditors will want to avoid the frightening liability associated with the ATR rule. With the uncertainty regarding the secondary market for non-QMs, organizations with liquidity concerns may want to avoid non-QMs. Also, with the expansions to the definition of "qualified mortgage" (temporary and otherwise), it may be easier for certain creditors to make QMs than originally anticipated. However, before your institution goes "QM-only", we believe there are some counter- concerns that you should consider:
How much protection will you actually receive by only issuing QM loans?
Not as much as you might think. The QM safe harbor protects an institution only against allegations that your institution violated the ATR standard .... consumers still have an array of other options for challenging a loan. For example, with the complexity of defining "qualified mortgages," there is a serious risk that consumers could initiate litigation despite the safe harbor by challenging whether the loan was, in fact, a qualified mortgage to begin with!
Can you afford to not issue non-QM loans?
The CFPB openly admits that a mortgage loan is not bad just because it is non-QM ... QM loans are just "hyper-safe." What percentage of your business comes from non-QM loans? Are you willing to give away this business? For example, you have a long-time client who is "asset rich" and "income poor"--she wants a mortgage that exceeds the 43% debt-to-income ratio (and thus cannot be a QM loan), are you willing to turn her down? We're worried that with many of clients, there may be a larger/more aggressive institution across the street that is willing to make this loan instead.
Some experts opine that the new mortgage regulations benefit larger institutions and are likely to result in consolidations of the mortgage business. However, problems are often opportunities ... issuing non-QM loans may (if done correctly, with an aggressive compliance program) be an opportunity to grab market share from competitors, or at least a way to keep it "business as usual."
Are there other negative consequences of a QM-only policy?
Potentially. A recent joint release by financial regulators indicated that a QM- only policy would not elevate an institution's fair lending risk "absent other factors." But does that alleviate CRA concerns if a QM-only policy means your institution no longer makes loans in certain regions? What if you have a QM-only policy but make exceptions for certain customers ... will this still be a "red flag" for regulators in a fair lending exam?
Collaborate with us and we will survive together! After all, "No one can whistle a symphony. It takes an orchestra to play it." Halford E. Luccok, 20th century writer and theologian. We welcome your comments on this issue and criticism of our analysis.
Hopefully, you will find this newsletter informative, but please remember it is intended simply to "get the wheels turning" and is a far cry from a complete or thorough analysis of the issues. We do not offer legal advice, but rather advice based on our business experience.
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful - please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**