The House passed a bill Thursday that provides banks and credit unions with a safe harbor so they have more flexibility in originating single-family loans.
The Choice Act (H.R. 10) amends the Dodd-Frank Act and shields lenders from litigation so long as the mortgages remain in portfolio.
Currently, most mortgages enjoy Qualified Mortgage status because they are federally insured and meet Fannie Mae, Freddie Mac and Federal Housing Administration lending standards.
To increase access to credit, the Choice Act expands QM status to private mortgages that banks and credit unions originate and hold in portfolio. In 2016, only 9% of banks originated non-QM loans, according to an American Bankers Association survey.
The primary reason a loan fails to meet the QM test is because the borrower's debt-to-income ratio exceeds 43%, according to ABA Executive Vice President Bob Davis. Some loans also bump up again QM limits on points and fees and interest rates.
In addition, certain borrowers cannot meet QM documentation requirements because they have seasonal incomes or are self-employed.
The Choice Act allows banks to serve these borrowers, provided they "hold it in portfolio for the life of the loan," Davis said. If they sell it, the loan loses its QM status.
"They have 100% of the credit risk so there is a direct alignment in the interests of the borrower and the lender," he added. In addition, these mortgages will be reviewed by the bank's regulator.
"There are a lot of loans that banks used to make," Davis said, but they don't under the current regulatory regime. "So they should be encouraged to do that and be given QM status," he added.
The Choice Act now goes to the Senate for further consideration.