Inter-agencies Issue Statement on Supervisory Approach for QM and Non-QM loans
by: Anna DeSimone
December 13, 2013 the Board of Governors of the Federal Reserve System Federal Deposit Insurance Corporation National Credit Union Administration Office of the Comptroller of the Currency issued a Statement on Supervisory Approach for Qualified and Non-Qualified Mortgage Loans. The statement is provided below.
The agencies are issuing this statement to clarify safety-and-soundness expectations and Community Reinvestment Act (CRA) considerations for regulated institutions engaged in residential mortgage lending in light of the Consumer Financial Protection Bureau’s (Bureau) Ability-to-Repay and Qualified Mortgage Standards Rule (Ability-to-Repay Rule), which was issued January 10, 2013, and is effective January 10, 2014.
Background
The Bureau’s Ability-to-Repay Rule implements Section 129C of the Truth in Lending Act, which requires lenders to make reasonable, good faith determinations that consumers have the ability to repay mortgage loans before extending such loans. 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). In accordance with the Bureau’s Ability-to-Repay Rule, a QM 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 Bureau’s Ability-to-Repay Rule provides lenders with several ways to satisfy the ability-to-repay requirements, including making loans that do not qualify as QMs, referred to as “non-QM” loans. Please refer to the Bureau’s Ability-to-Repay Rule for a detailed explanation.
Safety-and-Soundness Expectations
The agencies recognize that many institutions are in the process of assessing how to implement the Bureau’s Ability-to-Repay Rule. The agencies emphasize that institutions may originate both QMs and non-QMs, based on their business strategies and risk appetites. Residential mortgage loans will not be subject to safety-and-soundness criticism based solely on their status as QMs or Non-QMs.
Purpose
Regardless of whether residential mortgage loans are QMs or non-QMs, the agencies 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. Institutions also 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.
The Community Reinvestment Act and Fair Lending
The agencies recognize that some institutions may originate only or predominantly QMs, particularly when the Bureau’s Ability-to-Repay Rule first takes effect. In fact, the agencies note that some institutions’ existing business models are such that all of the loans they originate satisfy the requirements for QMs.
As recently addressed in the Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule issued on October 22, 2013,4 the requirements of the Bureau’s Ability-to-Repay Rule and the fair lending laws are compatible. Similarly, the requirements of the Bureau’s Ability-to-Repay Rule and CRA are compatible. Accordingly, the agencies that conduct CRA evaluations5 do not anticipate that institutions’ decision to originate only QMs, absent other factors, would adversely affect their CRA evaluations.
As required by the CRA, the agencies assess institutions’ performance in helping to meet the credit needs of their communities, including low- and moderate-income neighborhoods, consistent with safe-and-sound operations. Each evaluation takes into account the unique performance context of the institution.
About the Author
Anna DeSimone is President and Founder of Bankers Advisory, Inc. She can be reached at anna@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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