Regulators Grant Some Leeway to Lenders on QM vs Non-QM

The four federal agencies mostrninvolved in supervision of financial institutions as they work to comply withrnnew Dodd-Frank Act regulations said today that, as they conduct their examinations,rnresidential mortgagernloans will not be subject to safety-and-soundness criticismrnbased solely on their status as QMs (qualified mortgages) or non-QMs.</p

Thernfour regulators, the Federal Reserve Board, Federal Deposit InsurancernCorporation, National Credit Union Administration, and the Office of thernComptroller of the Currency, said they were issuing a statement to clarifyrnsafety-and-soundness expectations and Community Reinvestment Act (CRA)rnconsiderations related to the QM and non-QM loans offered by regulatedrninstitutions as they assess the implementation of the Consumer FinancialrnProtection Bureau’s Ability-to-Repay and Qualified Mortgage StandardsrnRule.  That rule, issued by CFPB onrnJanuary 10, 2013, takes effect on January 10, 2014. </p

The Bureau’s Ability-to-Repay Rule provides lenders with a presumption of compliance withrnthe ability-to-repay requirementsrnfor loans that meet thernregulatory definition of arn”qualified mortgage” (QM) which may notrnhave certain features, such as negativernamortization, interest-only payments, or certain balloon structures, and must meet limits on points and feesrnand other underwriting requirements.  The rule allows lenders severalrnoptions to satisfy the requirements,rnincluding making loans that do not qualify as QMs.</p

From a safety-and-soundnessrnperspective, the regulators say they want to emphasize that an institution mayrnoriginate both QM and non-QM loans, based on its business strategy and riskrnappetite.  They recognize that some institutions may originaternonly or predominantly QMs, particularly when the Bureau’s Ability-to-Repay Rulernfirst takes effect.  In fact,rnthey note that some institutions’ existingrnbusiness models are such that all ofrnthe loans they originaternsatisfy the requirementsrnfor QMs and the regulators do not anticipate that institutions’ decision to originaternonly Qualified Mortgages, absent other factors, would adversely affect theirrnCRA evaluations.</p

Regardless ofrnwhether residential mortgage loans are QMs or non-QMs, the agencies sayrnthy continue to expect institutions to underwrite residential mortgagernloans in a prudent fashionrnand address key risk areasrnin theirrnresidential mortgage lending,rnincluding loan terms, borrowerrnqualification standards, loan-to-value limits, and documentation requirements and should applyrnappropriate portfoliornand risk management practices.  Institutions should continuernto comply with thernapplicable guidance on residential mortgage lending issuedrnbyrntheir respective federal regulators.

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