Is advice from national experts on QM misleading for New England banks? Thoughts on non-QM lending,

Today we'd like to share some thoughts on lending outside the "qualified mortgage" box, some pressure points with QM's specific underwriting standards, and a note on upcoming diversity regulations that may affect you (another gift from Dodd Frank).

Thoughts on Non-QM Lending

Still considering whether to get into non-QM lending? Keep in mind that national information on ATR/QM may be misleading for New England bankers. While the national experts may push more for QM-only lending ... banks with low delinquency rates and a strong history of conservative underwriting standards (e.g., many of our New England clients!) might be able to play in the non-QM world with much less risk than the "cowboys" who can only look back to no-doc and subprime policies and a history of high delinquencies or even new lenders without historical underwriting standards. What do you think? Is there more to this story?

Danger, advertisement: Need help? Better things to do (e.g., making loans)? Whether it's a risk assessment to evaluate whether you should get into this at all, or help designing a non-QM lending policy that fits your organization, we would love to chat and see if we can help. Give us a call or ask for a quote. By the way, this isn't the first time we've mentioned non-QM lending, look here for a previous newsletter addressing QM-only policies, and here and here for two on non-QM policies.

Appendix Q Pitfalls

We won't get into the details here, but here's a list of "Appendix Q Pitfalls" that your underwriter (and star processors) will be aware of that may need to be communicated to other employees to avoid slowing up the closing process with repeated requests for information (maybe look at these also to anticipate policy decisions the bank will be required to make).

1. Self-employed borrowers ... look here for issues with (a) self- employed contractors, (b) real estate commission income, (c) P&L statements, and (d) "Analyzing the business's financial strength"

2. Alimony

3. Debts under 10 months

4. Asset-based income calculation

5. Social Security income: Benefit Verification Letter + "grossing up"

6. Bonus + overtime income when it "varies significantly"

Remember, where Appendix Q is silent or unclear, you may be able to supplement Appendix Q with GSE or agency guidelines.

Top notch quality control is a great way to mitigate ATR/QM risks. Not sure what the market is going to do tomorrow? Outsourcing is a great way to turn QC from a fixed cost into a variable cost. But the days of outsourcing QC to a person working out of his garage and doing reports on a Word document are gone ... give us a call or ask for a quote if you'd like to work with the best (remember, "You'll never complain about Spillane.").

Section 342: Office of Minority and Women Inclusion

ATR/QM wasn't the only thing to come out of Dodd Frank ... has anyone heard of Section 342 on minority and diversity inclusion? This may not be on the top of your to-do list today, but it's worth thinking about. Some planning today will make your life a lot easier tomorrow. Section 342 requires federal agencies (SEC, CFPB, FDIC, NCUA, etc.) to assess

the policies and practices regarding diversity (in management, employment, and business activities) of organizations that they regulate.

Keep Section 342 in mind when assessing your vendor relationships ... and consider these other tips:

• Advertise for new-hires (Not advertising may tend to be discriminatory if the people in your social or professional network tend to generally to be non-minorities and males).

• Objective hiring criteria (Similar to your lending policies, where there is discretion, there is discrimination)

• Evaluate and assess diversity of organization at periodic intervals

• Implement and advertise accommodations for pregnancy (Consider flexible scheduling, time off for maternity leave, job sharing, on-site childcare, and other policies that may make your workplace friendly for women who want to balance a career and children)

• Recruit at diverse and minority-serving organizations and establish relationships with the right groups

To that last point, you might consider a partnership with YearUp, which is an intensive training program that provides low-income young adults with a combination of hands-on skill development, college credits, and corporate internships. Both the Atlanta and Chicago Fed partner with YearUp to recruit interns and cite their partnership with YearUp as an attempt to meet Section 342 requirements. This may be an effective way to help with Section 342 compliance and also just a great way to locate high-level talent that may otherwise be overlooked. Take it from Mr. Kurt Noyce, President of Embrace Home Loans, who writes:

What started as a community outreach has become so much more

... Our experience with Meghan Hughes and her team at Year Up- Providence has changed our employees, and our company ... the interns we have employed are extraordinarily well prepared, extraordinarily willing, and extraordinarily capable. As an organization that has hired hundreds of recent college graduates in the last few years, we have found these Interns equally qualified ... but more so, their attitudes, perseverance and life- stories have inspired our entire workforce

YearUp has offices in Boston and Providence. Visit their website or contact the Executive Directors directly: Meghan Hughes in Providence at 401-421-7819 ext. 1112 or Casey Recupero in Boston at 617-542-1533 ext. 1030.

There are more important and interesting things than banking regulations, so thanks for tuning in. How does that country song go? Something like, "A welder's son and a banker's daughter ... All they want ... is everything."

"We are all a little weird and life's a little weird, and when we find someone whose weirdness is compatible with ours, we join up with them and fall in mutual weirdness and call it love."

- Dr. Seuss.

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.**

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