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.

The 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 by their respective federal regulators.