Regulators Grant Some Leeway to Lenders on QM vs Non-QM


The four federal agencies most
involved in supervision of financial institutions as they work to comply with
new Dodd-Frank Act regulations said today that, as they conduct their examinations,
residential mortgage
loans will not be subject to safety-and-soundness criticism
based solely on their status as QMs (qualified mortgages) or non-QMs.

four regulators, the Federal Reserve Board, Federal Deposit Insurance
Corporation, National Credit Union Administration, and the Office of the
Comptroller of the Currency, said they were issuing a statement to clarify
safety-and-soundness expectations and Community Reinvestment Act (CRA)
considerations related to the QM and non-QM loans offered by regulated
institutions as they assess the implementation of the Consumer Financial
Protection Bureau’s Ability-to-Repay and Qualified Mortgage Standards
Rule.  That rule, issued by CFPB on
January 10, 2013, takes effect on January 10, 2014.

The Bureau’s Ability-to-Repay Rule provides lenders with a presumption of compliance with
the ability-to-repay requirements
for loans that meet the
regulatory definition of a
“qualified mortgage” (QM) which may not
have certain features, such as negative
amortization, interest-only payments, or certain balloon structures, and must meet limits on points and fees
and other underwriting requirements.  The rule allows lenders several
options to satisfy the requirements,
including making loans that do not qualify as QMs.

From a safety-and-soundness
perspective, the regulators say they want to emphasize that an institution may
originate both QM and non-QM loans, based on its business strategy and risk
appetite.  They recognize that some institutions may originate
only or predominantly QMs, particularly when the Bureau’s Ability-to-Repay Rule
first takes effect.  In fact,
they note that some institutions’ existing
business models are such that all of
the loans they originate
satisfy the requirements
for QMs and the regulators do not anticipate that institutions’ decision to originate
only Qualified Mortgages, absent other factors, would adversely affect their
CRA evaluations.

Regardless of
whether residential mortgage loans are QMs or non-QMs, the agencies say
thy continue to expect institutions to underwrite residential mortgage
loans in a prudent fashion
and address key risk areas
in their
residential mortgage lending,
including loan terms, borrower
qualification standards
, loan-to-value limits, and documentation requirements and should apply
appropriate portfolio
and risk management practices.  Institutions should continue
to comply with the
applicable guidance on residential mortgage lending issued
their respective federal regulators.

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