Written By: Glenn Michaels, Op-Ed Writer
Are you a QM lender?
Will you do non – QM loans?
One of the most important regulatory changes facing everyone is what the characteristics are of and how to define a “Qualified Mortgage.” This decision will have an enormous impact on the mortgage markets, and will ultimately determine the types of mortgages generally available in the United States, and the minimum qualifications for those seeking to obtain a home loan.
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The qualified mortgage concept is found in Title XIV of the Dodd – Frank Act. Under this ACT, a creditor may not make a mortgage loan without first determining that the borrower has a reasonable ability to repay the loan. A penalty for violating this test includes fines, civil liability, and potential class action liability.
Further, failure to comply with this standard can be raised as a defense to a foreclosure action brought by the original creditor or assignee.
The legislation defines certain types of loans as being “qualified mortgages,” and creates a presumption that these loans satisfy the ability to repay standard mortgage loans. Regulators are authorized to issue regulations to modify the definition. According to reports regulators are whether it should narrow the definition of the QM, in order to create a pool of non – QM loans that would be sufficient to develop a market for these products.
The legislative history shows that as the legislation moved through The Congress, concerns were raised repeatedly that imposing liability on mortgage originators and the secondary market for failure to a subjective “ability to repay” standard would have a negative on mortgage availability. These concerns were voiced by federal and state regulators, industry representatives, and members of Congress, it was argued that non – QM loans may not be made at all, and if one was made, it would be more costly than a comparable QM loan. As a result, the statutory definitions of the QM in the predecessor bills expanded to include new classes of loans, restrictions on interest rates and points and were raised, and interest rate caps were eliminated.
During the House Financial Service Committee mark – up, an amendment was offered by Representative Dennis Moore (D – Kan) and the concept of “ensuring responsible and affordable mortgage credit availability” to the bill. The amendment was eventually adopted, but was added to the section on Congressional findings, rather than congressional purposes.
When it was pointed out to above mentioned House Committee Chairman Frank that the amendments might not be effective because of its placement in the bill text, the chairman guaranteed that it would be fixed on the floor. Chairman Frank was emphatic: “Yes, it is a problem when people get mortgages they shouldn’t get. It has been a historically greater problem that some people couldn’t get mortgages they should get. I will guarantee…that doesn’t happen.”
Barney Frank kept his word. On the House floor, he amended the bill modifying the QM “upon a finding that regulations are necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of the section. “This change is in included in the final legislation. The history of the amendment is clear; it was added to the legislation to change the QM in order to ensure that it was not limiting responsible and affordable mortgage availability. The intent was to make the QM basket of all safe loans.
The legislative history demonstrates that Congress was concerned that the QM test could limit credit availability to creditworthy borrowers. The statutory definition of a QM loan was modified repeatedly to include more and more loans. The Congressional hearings were completed with warnings about the potential for cutting off mortgage credit for qualified borrowers, and warned that few, if any non – QM mortgages would be made.
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Chairman Frank was so concerned about the possibility of unduly constricting credit, that he guaranteed the issue would be addressed in the final legislation. The final legislation includes as amendment authored by Congressman Frank that required the legislation to consider mortgage credit availability as part of its rulemaking process.
There is nothing in the legislation to indicate a narrow standard for QM loans or non – QM loans.
The age of QM is here, your company and your institutional investors must decide do we only offer QM’s or do we also offer non – QM loans and at what price vs. the risks associated in doing non – QM loans.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
