How Will the New QM Points + Fees Cure Work?
Although there's no effective date yet, it appears to be a foregone conclusion that the CFPB will modify the QM Rule to allow for a "cure" provision post-closing for mistakes made in calculating "points & fees." Here is our take on how this is basically going to work.
Let us say first that this, while confidently expected to become the final rule, has not been finalized yet. When it is finalized, there may be some changes. But here's what it looks like as of now!
General Rule
The CFPB is going to allow lenders to fix QM points + fees overages post-closing (Note: technically, it's "post-consummation", and technically- "consummation" is not the same as "closing"- see page 51 at the CFPB's guide- but post-close is easier to say and it's close enough for our purposes).
Example
You make what you think is a QM loan. Afterwards, you realize that points + fees were miscalculated and exceed the 3% limitation by a small amount. Under some circumstances, the CFPB will now allow a lender to fix this mistake by refunding the borrower enough to get back within the 3% limit.
Requirements
It's not as easy as find & fix. You'll have to meet these other requirements:
Good faith attempt to originate QM. The regulators are worried about people abusing this process by purposefully exceeding the limits and fixing them only when caught. That's why, the post-close cure provision only allows you to reduce the points + fees where your original intent was actually to originate a QM. Evidence of "good faith" here includes:
Policies and procedures in place to correctly calculate points + fees
Pricing that is consistent with QM (here they're assuming that lenders are pricing differently for QM and non-QM)
2. Fixed within 120 days. For the same reasons, you only have 120 days to find and fix this mistake. Better hope your QC vendor is turning loans around fast enough!
3. You have policies and procedures on this. To take advantage of the post-close cure, the CFPB plans to require lenders to have P+P in place for the post-close review of loan files exceeding the points + fees threshold.
Rationale
Why are we getting this rule change? Basically- the CFPB admits the points + fees test is difficult and it doesn't want lenders cutting lending off short of the full 3% to "play it safe" (because that might mean reduced access to credit for borrowers). See the quote from them below:
Quote from the CFPB:
The calculation of points and fees is complex and can involve the exercise of judgment that may lead to inadvertent errors.... The [CFPB] understands that some creditors may not originate, and some secondary market participants may not purchase, mortgage loans that are near the [QM] limits on points and fees because of concern that the limits may be inadvertently exceeded at the time of consummation. Specifically, the [CFPB] understands that some creditors seeking to originate qualified mortgages may establish buffers, set at a level below the points and fees limits ... to avoid exceeding those limits. Those creditors may simply refuse to extend mortgage credit to consumers whose loans would exceed the buffer threshold, either due to the creditors' concerns about the potential liability attending loans originated under the general ability-to-repay standard or the risk of repurchase demands from the secondary market ..... Where such buffers are established, the Bureau is concerned that access to credit for consumers seeking loans at the margins of the limits might be negatively affected. The [CFPB] is also concerned that creditors may increase the cost of credit for consumers seeking loans at the margins of the limits due to compliance or secondary market repurchase risk. .... Without a points and fees cure provision, the Bureau believes that some consumers might be at risk of being denied access to responsible, affordable credit, which is contrary to the purposes of TILA.
Practically Speaking ....
This raises two questions: (1) How will we do this? and (2) Is it worth it? First, you will "fix" the mistake simply by giving the borrower a refund within 120 days. To the second question- we've opined before that the loans lenders will regret the most will be the ones that could easily have been protected by QM. This will be in a few years, when we first see the fallout from ATR/QM with lawsuits, delinquencies, etc. These will be loans that were mistakenly originated as non-QM because of simple errors in calculation or documentation. So the answer, we think, is yes. If you can switch a dangerous non-QM loan into a safe QM loan, and for only a small amount of money, yes, it is definitely worth it.
Effect on Industry
As stated above, this is intended to allow more lending up to the 3% limit. Looking at this, it looks like it will be a nice change for large lenders, but have little impact for small lenders right away. Most medium-to-small New England lenders haven't struggled with the 3% threshold yet ... most loans fit easily within the 3%. But while that's true now, watch for this to be a helpful tool to remember when (a) a mistake is made or (b) as rates rise, more borrowers are buying down rates, and the 3% threshold starts to look a lot less comfortable.
Other news/thoughts/trivia:
Tune in this Friday to the MMBA's compliance call ... we're talking about the new Mass. Flood law. Email Deb Sousa for more information dsousa@massmba.com.
Looking forward to the Newport conference ... we'll see you there!
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Small lenders ask, "How can I compete against large banks, that have so much to offer borrowers?" Large lenders ask, "How can I operate more like a small company, with scores of devoted customers?" I heard a story of a small bike shop on the West Coast. A larger competitor was selling the same bikes at a much lower cost. The owner realized his days were numbered, unless he could differentiate his business. For years, he had been selling small bike parts ... nuts/bolts, etc. ... at a great margin. He may sell a bolt for $1.99 that cost him only a nickel. The owner realized customers were willing to pay for these because they were all "one-offs" and little emergencies ... the tire to a girl's bike broke down, her father came in to fix it. If he sold 450 all year, that earned the company a couple of grand, costing him only $95. To save his business, the owner began giving away these small parts for free. Customers were surprised and grateful. All in all, this costs the owner $95/year. But it gives him 450 chances to build dependency and loyalty with customers. And as a result, he is able to stay in business when his bikes sell for twice the cost of similar bikes at Wal-Mart or other cutthroat competitors.
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