We choose to make Non-QM mortgage loans, and I hope you do as well. We are a small creditor (Under $2 Billion)
Two helpful tools from CFPB’s website helped us make this decision:
Scroll down to the quick reference charts and find: “Small Creditor Qualified Mortgages Flowchart”
This is an invaluable tool to determine if you are making Qualified Mortgages or not.
We fell out of the QM flowchart at the third panel because we make real estate loans that have increasing interest rates (step ups) and we offer balloon payment loans (those with less than 70% LTV). Both of these features are currently legal and are also legal going forward. So, why the concern about QM?
The CFPB is an outcome of the Dodd-Frank act. And, if you remember history, that came about because of bad lending practices. Banks and mortgage companies made loans without verifying the borrowers’ ability to repay. The Ability to Repay (ATR) rules requires lenders make a reasonable, good-faith determination that the borrowers have the ability to repay their loans. Most credit union people I know at this point say – “DUH!!!!” I know this is very basic to credit unions which have to bear the losses of bad loans. However, not all lenders were stuck with dumb loans. They foisted them off on unsuspecting investors. The secondary market needed a fix. Dodd-Frank attempts to do that. We have never sold a real estate loan on the secondary market and we certainly won’t be doing that going forward as we are NON-QM.
2. On the same page of the CFPB’s website, find Rule Compliance guide Video: Ability to Repay/ Qualified Mortgage download.
This guide provides a detailed explanation of the ATR rule and gets real interesting around page 26. Here we find the ins and outs of Safe Harbor and “rebuttable presumptions in terms of liability protection”. This part of the guide outlines which types of creditors and loan programs are exempt from the ATR requirements. QM loans are by default in compliance with ATR requirements. Non QM loans are subject to liability.
When most credit union people I know hear that, if we don’t make “Qualified Mortgages” as defined under the rules, we have no liability protection… our blood pressure rises and we look for the closest door. Please resist this urge! Let’s look at what this actually is and see if the presumed risk is worth the tradeoff of serving our members with products that help them and this liability. Remember, somewhere along the line, you or your predecessor made that decision about every product and service your shop currently offers.
The risk here is if consumers cannot repay their mortgage loans, they could claim that you failed to make a reasonable, good-faith determination of their ATR before you made the loan. In other words, during the first three years of the loan a member may state the mean old credit union put them in a loan they could not afford to repay. Given our history, and for those of us who hold our loans, that’s highly unlikely. Additionally, by making regular payments over time, this in itself is proof of ability to repay. If your member is to prove violation of ATR, they must be able to show that based on the information available to you at the time the mortgage was made, the consumer did not have enough residual income to meet living expenses. This liability may give you pause on making marginal loans, but it shouldn’t be a reason to abandon the market entirely.
For us, the risks of the ATR liability are far outweighed by our member’s needs. Our real estate loan products are very useful to their retirement planning. These have been very popular products in the past, and we are determined to continue to offer them going forward as long as our members find them valuable.
I urge you not to dismiss making non-QM loans out of hand. Credit unions weren’t responsible for this lending debacle and the legislation that came out of it. We should continue to serve our members as we’ve been encouraged to on numerous occasions by the CFPB’s Director, Richard Cordray.