The Dangers of a QM Loan Gone Non-QM
Many lenders think repurchase or non-saleable, when they think of the possibility of a mistake on a qualified mortgage rule loan that actually causes the loan to fall into non-QM status. While this is certainly a significant problem, the issues with the sale or possible repurchase of the loan only represent the beginning of a lender’s troubles.
The lender, who has just essentially admitted to having botched the origination and/or underwriting of the loan by identifying it as something it is not, is extremely vulnerable to a lawsuit under the ability to repay rules. Remember, the ability-to-repay rules require a lender to have a good faith belief the borrower can repay the loan.
Yet, the existence of that good faith belief can be easily challenged where the lender’s internal errors caused it to improperly classify the loan as QM when it really was a non-QM loan. Making the jump from a “mistake” to lacking a “good faith belief” will likely not be too difficult for a jury, unless the error is the result of some improper action by the borrower. Where the lender’s internal processes fail, the finding of an ATR violation is extremely possible.
For this reason, lenders must be especially careful when dealing with loans that have a higher propensity for QM determinative error. If those loans (e.g., at 42.9% debt-to-income ratio) ultimately cross into non-QM territory, not only does the lender lose the safe-harbor and experience multiple problems relating to sale-ability, the lender is likely stuck in an extremely vulnerable position if the loan ultimately defaults.
As such, it would be wise to place extra scrutiny on those loans having the greatest risks of error. This is especially true when mistakes could be material to QM status.