It has been a suspicion expressed by a number of insiders and the ComplianceEase audit quantified it, says Jason Roth, the company’s SVP of product management. As the QM compliance deadline approaches it’s important to pinpoint “the highest-impact barriers” to meeting the standard. These are the areas lenders need to focus on before and after Jan. 10.
The survey inquired whether loans comply with QM and the Dodd-Frank Act requirement that lenders assess borrowers’ long-term ability to pay their mortgage.
More than half of such loans have fees that exceed the new 3% points and fees threshold under the Home Ownership and Equity Protection Act.
Loans with fees that exceed the 3% threshold typically exceed it by nearly $1,500, while the rest of the loans originated “have APRs that are too high to qualify for the safe harbor classification,” he said. Based on current guidelines, these loans also will not be eligible for purchase, insurance or guarantee by the government-sponsored enterprises or government agencies.
Lenders generally try to avoid originating high-cost loans. However, close to 3% of loans in the study would move into the federal “high-cost” category, and on average, exceed the new HOEPA points and fees threshold by more than $1,000.
The ability-to-repay requirement is the biggest concern for all banks, he says, but the most significant risk when talking about the property itself is foreclosure.
An equally big concern is the impact of the points and fees.
It is a nuance that seems to be lost in the wider QM conversation, according to Roth, but it worries lenders who are looking for opportunities to lower lending costs to compensate for the fact that in the future they will have to rely on a lower fee threshold.
The QM rule can create legal liability for the life of a loan for lenders, secondary market investors and servicers, says John Vong, president of ComplianceEase, so bankers and mortgage executives “need to evaluate their technology providers very carefully.”
“Judging from the most frequently asked questions we’re getting, QM compliance will be a challenge even for the best prepared lenders,” Roth says. This is especially true for those “smaller banks that have been operating within a limited geography,” which now have to rely more on technology to ensure they comply with QM and the borrower ability to pay requirement.
Everyone is feeling the pressure. “But I’m an optimist,” he adds, the industry will adapt to the rules on time.