The Consumer Financial Protection Bureau’s qualified mortgage rule is more than the 3% fee cap and the ability-to-repay verification requirements. Yet those are the items that the industry is concentrating on.
National Mortgage News has reached out to three compliance experts, Faith Schwartz of CoreLogic Government Solutions, Robert Lotstein of LotsteinLegal PLLC and E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey, and asked them what they see as the areas mortgage lenders need to know about QM that is not being discussed. The opinions expressed by Schwartz are her own and not those of CoreLogic.
Faith Schwartz: There are many areas a lender, borrower and even investor will need to be thinking about to successfully implement the QM rule. This new rule will have a significant impact to systems, people and processes as lenders find ways to create a clear path to QM lending. While there are many important features to this rule, one area that will be complex is around pricing the loans. The category of points and fees, loan level price adjustments for government-sponsored enterprise loans, and avoiding bumping up to the high-priced mortgage loan trigger are all areas that can be tricky and need to be managed carefully as lenders (investors) go forward for QM loans.
There will be a balancing act needed to manage the borrower’s needs and the lender’s needs as these types of issues get resolved. And finally, it remains unclear what the risks and pricing will for non QM loans that fall outside of the defined standards.
Robert Lotstein: I think one area to watch and one that I am not hearing much about is the synchronization of state law and the fact that you cannot cure an error of labeling a transaction as QM when it does not meet the definition.
Regarding synchronization, some states may create QM state equivalents. The states are more concerned with origination than with securities so we will likely see state laws adopting QM-like ability-to-repay rules and ignoring any nuances that may result from the overlay of QRM rules. The federal law is a floor and we will have to wait to see if states will implement any greater protections. Possibly more importantly, we will need to see how conflicts with state laws are resolved because we often find synchronization issues when a state attempts to "adopt" a federal law by creating a parallel state equivalent and ends up with conflicts due to varying definitions, etc.
National banks enjoy preemption, but their subsidiaries no longer have the same benefits. We are seeing more states requiring national bank subsidiaries to license (for example Arkansas and Oregon). While national banks themselves may not be impacted by the state requirements, their correspondents and brokers must comply and the banks have to be sure they are purchasing loans that were in compliance when originated.
E. Robert Levy: In terms of what creditors should be concerned about regarding QM that they may not have clearly in mind, the 43% debt-to-income requirement must be evaluated. I find it curious that in industry meetings and discussions about QM, it is assumed (or not debated) that you simply meet the criteria set forth by the CFPB for QM including the 3 percentage point cap on points and fees, 43% DTI, no balloon, etc., and you have yourself a (loan which meets the) safe harbor.
However, in addition to the much analyzed 3% cap, the analysis required to properly determine whether the loan meets the 43% limit is not the subject of the same concerns expressed by the industry participants at these meetings in part because the CFPB puts it in the context of applying the same type of analysis which creditors have applied over the years, so why worry?
The difference is, however, that a lot more is now at stake with the risks of an error takes you out of the safe harbor and subjects the creditor not only to litigation risk (that may be enhanced by the negative perception due to the failure to meet a specific CFPB safe category) but also exposes the entity to regulatory compliance risk with a team of experts analyzing its documentation with the potential for significant fines and penalties.
When one considers the analysis provided by Appendix Q, which provides official guidance in calculating the 43% DTI, there remains a good deal of subjectivity with room for failure during an exam or in litigation when it is claimed that the loan has exceeded 43%. This is true in both the income and debt analysis.
For example, in verifying employment for the most recent two years, a determination must be made as to whether the employment can reasonably be expected to continue, which in some circumstances can be problematic.
This is just one example of a calculation that remains exposed to someone after the fact (with time for in depth thought and analysis) challenging one of the factors that went into the DTI computation. Simply stated, QM (with a safe harbor) may be exposed to more potential arguments than what might appear to be the case.
