Historically, loan origination systems have been designed from an operational standpoint, leaving loan officers to manage the completion of the origination process in multiple areas of the LOS and sometimes in separate systems altogether.
The new qualified mortgage requirements necessitate an added dimension of centralization within an LOS to accommodate the new requirements, and lenders would be wise to invest in such technology and update their current origination systems in order to provide their loan officers a more holistic view into the details of the mortgage.
Prior to the January 10 deadline, centralizing the LOS data was not a top priority and many lenders would work with LOS providers to set up an initial workflow for loan processing. Rarely did a lender revisit that initial workflow and make sure it still worked for their loan officers.
Today however, regulatory oversight is very data driven and systematic, requiring lenders to maintain a more comprehensive understanding of all of the latest QM requirements.
The LOS is typically the one place with the most up-to-date information regarding the loan; therefore it is important that loan officers are immediately alerted when QM requirements are not met. Presenting any issue when it occurs saves time, ensures compliance and results in an increase in productivity.
In addition to alerts, an LOS should bring together key information that a loan officer must be aware of regarding QM. Information that is critical to a loan’s ability to qualify for QM, such as loan types, exceptions, limits, income and other data, should be gathered and presented in a single view. The loan officer should have a comprehensive view of the loan’s qualifying factors so that adjustments can be made, if possible, to meet ability-to-repay/QM requirements and send it to the next stage.
One primary factor in determining a loan's QM status is the borrower's debt-to-income ratio, which in most cases cannot exceed 43%. As the borrower's basic income and debt levels are input, the LOS should update residual income and immediately notify the loan officer of the status of the loan’s qualification under QM requirements. The loan officers should be able to easily determine if a borrower has too much debt and/or can't afford that new house payment under ATR/QM.
Origination charges, title fees for the lender and the borrower, settlement charges, recording charges, transfer taxes and broker compensation are just a few areas where the input of an erroneous amount could drastically impact the overall QM qualification.
If the fee threshold is breached, an LOS should immediately notify the loan officer of the amount and also allow him or her to see by how much the loan is over. Currently, QM rules state that points and fees must be less than or equal to three percent of the total loan amount (for loans greater than $100,000). Good training and LOS setup should be able to provide loan officers with the tools they need to stay under that fee cap (this is especially important when dealing with affiliate companies).
The overall goal is to centralize the borrower and loan information within the LOS so that alerts can be triggered when a loan fails to meet QM requirements, rather than have the loan officer search through the siloed information to see what field must be updated to comply.
Today’s investors are less inclined to purchase loans that fail to meet QM requirements, meaning lenders must be willing to invest in technology systems that support compliance to ensure sustainable business moving forward. Failure to do so could force lenders to hold non-QM loans on their books which will hinder profitability.
Additionally, it is unclear at this time what the secondary market for non-QM loans will look like in the coming months.
From time to time, some lenders work with higher risk borrowers, such as those with lower credit scores. To offset this risk, lenders that are fully compliant with QM rules are granted legal protection called "rebuttable presumption." This is in place as a safeguard and protects lenders from borrowers who, due to the inability to make payments, may challenge the validity of the loan.
If a lender fails to properly analyze a borrower’s income and debt obligations or if points and fees were incorrectly assessed, the borrower can take indefinite legal recourse on the grounds that the lender failed to qualify the loan per QM guidelines. It is paramount that systems are engineered and installed to aid in the assessment of these qualifications.
With QM rules now in effect, lenders have a choice: invest in the right technology and leverage a centralized LOS to move forward, or ultimately get left behind. What choice will you make?
Dan Jones is vice president of technology for Churchill Mortgage Corp., Brentwood, Tenn. He manages Churchill's infrastructure, operating platform, programming and web initiatives.