What will be your policy for non-QM lending?
As our senior compliance guy, Jerry Tracey, likes to say--there is no regulation that requires the bank to lose money. This is true even of the new federal regulations for residential mortgages! In fact, some clients even view the new regulations as a way to gain a competitive advantage. Please allow us to share some thoughts for those institutions considering lending outside the "QM" box, and take a look into what such a "non-QM" lending policy would look like.
"QM-only" might be the best choice for your institution, but we predict that the temptation for depository institutions to offer some non-QM options (putting aside "small creditors," who have these advantages without assuming the risks of non-QM lending) will be high. Not only because non-QMs can be quality loans, but because, well, business isn't so great right now. Please let us provide some thoughts on developing a non-QM lending policy, if you decide to do so:
Competitive Advantage
Non-QM lending is an obvious advantage over non-depository institutions with no portfolio and over depository institutions that are either too conservative to do non-QM lending, or worry that they lack the compliance resources to do so safely. This, of course, has to be balanced against the risks of non-QM lending. But what will you do when the bank across the street is making loans that you won't? It seems hard to escape some form of non-QM lending.
From a compliance perspective...
Who the bank will offer "non-QM" loans to is a red hot fair lending concern. From what we've been hearing, regulators will be looking closely at your non-QM lending policies, predicting that many banks will offer non-QM loans only to "select" customers, after originally considering a QM-only policy.
Mitigate this risk by developing a clear written policy for non-QM lending. Be prepared to explain your policy with a legitimate business reason. ATR/QM already threatens lending to minorities and other groups protected by fair lending laws--unless your policies are spelled out in plain English, regulators may assume the worst and those harsh statistics will not help.
Many lenders are considering offering non-QM loans only to existing customers. This is not a blatant fair lending concern (but please reconsider, for example, limiting non-QM lending expressly to your wealth management, or "high-asset" clients). However, be careful to assess whether this would have a disparate impact in violation of fair lending--is your existing client base a fair representation of the racial composition within your assessment area(s)?
The better way to write a non-QM lending policy is to focus on compensating factors... our clients have explored requirements such as higher credit scores, down payments, etc.
Remember, while ATR/QM and fair lending are (somewhat?) compatible, you are not protected by the October interagency statement unless you are strictly QM-only. In that release, the regulators (and by the way, not HUD, who enforces many fair lending regulations) only stated that QM-only policies would not per se result in fair lending violations.
From a business perspective...
But to what extent should the only addition to your non-QM lending policies be that you charge higher rates for non-QM? This will, of course, depend on many things. Are your historical underwriting standards strong enough to survive as non-QM without additional compensating factors? What is your bank's decision on how much risk ATR/QM presents to your organization? Do you have the room to charge higher rates? Is that competitive?
But let's be realistic. Business is bad enough already. Assuming non-QM loans are good loans, doesn't making good loans make good business sense? Why arbitrarily limit this to clients with existing relationships with the bank? If your best client's daughter comes in for a mortgage, are you not going to make that loan simply because it falls outside of your QM-only or strict non-QM lending policies?
We believe--that for institutions that continue to use strong underwriting standards (remember, shown to be safe both in good economies and bad)--why shouldn't your only non-QM lending policy be that you would have written it before the ATR regulation, and that you'll continue to do this now--even if it falls outside the QM bucket.
Now that the new rules have taken effect, we hope that your compliance efforts have gone better than this poor soul's efforts to commit arson... World's worst arsonist sets himself on fire... camera catches him running into store with gasoline container, running out of store on fire.
In closing... (on a different matter)
Some of us have lost someone close to them ... many more of us know someone who has. Not too many of us actually do anything about it. One exception is our friend, Peter Milewski, who is determined to make a difference through his Butterfly Foundation, established in his daughter's honor. Any contributions made are put to work "providing fulfilling life and learning experiences for school age children from families of limited financial means." The Butterfly Foundation recently partnered with MassHousing to deliver $4,200 to "Cradles to Crayons" along with six large bags of warm winter clothing and boots to children in need. Peter writes that, "[t]he foundation is relatively young, but with the support of kind and thoughtful people like you, we have grown and do more for needy and deserving children."
Find out more about the Butterfly Foundation, or make a donation online at http://www.carolynsfoundation.org/ or contact Peter by any of the following means:
Phone 781-934-2053
Mail 8 Cordwood Path, Duxbury, MA 02332
E-mail peter@carolynsfoundation.org
We support Peter's work, and that's why we promise to match up to
$1,000 of donations to the Butterfly Foundation made in the first quarter.
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.**