As of December 31, 2014, the CFPB increased the asset-size threshold under the Truth in Lending Act (TILA) for the small creditor qualified mortgage from $2.028 billion to $2.060 billion. What does this all mean? It means that, while you may not have been before, you may now be eligible to take advantage of this safe harbor.
What is the benefit of a small creditor QM status?
Small creditors can essentially originate non-QM loans as fully protected QM loans. If willing to hold a loan in portfolio for 3 years (unless sold to another small creditor), banks with an asset-size of less than $2.060 billion have the advantage of originating loans protected by QM status while avoiding any numerical DTI requirement and appendix Q’s arduous underwriting standards. Small creditors, while being held to less, still enjoy the same safe harbor of a general QM. There is a presumption that creditors that originate QMs have complied with the ATR requirements. That means a court will treat a case differently if a consumer files an ATR claim where the loan is a QM. Creditors will be presumed to have complied with the ATR requirements if they issue QMs. Essentially, QMs gives you more certainty about potential liability.
With estimates of defending an ATR legal challenge in the hundreds of thousands of dollars, that safe harbor looks pretty good!
What are the requirements for small creditor QMs?
Lenders with less than $2.060 billion in assets that originate 500 or fewer 1st lien residential mortgages per year are considered “small creditors” under the ATR/QM regulations.
The loan must meet the following requirements:
(1) Term no greater than 30 years
(2) Regular, periodic payments–no interest-only or neg. am.
(3) Meets QM points + fees test
– For all types of QMs, points and fees generally may not exceed 3 percent of the total loan amount, but higher thresholds are provided for loans below $101,953.
(4) Consider DTI (but not restricted to 43% or any other limit)
So the small creditor will still have to meet the points + fees test and have to deal with the increased documentation burdens. However, small creditors will not feel the pain of appendix Q or have to deal with the strict 43% DTI limitation that larger banks would still have to meet.
So . . . what’s the catch?
The catch with the small creditor QM is that you must hold it in portfolio for 3 years. It can be sold within 3 years to anyone, but it will lose its QM-status if sold to anyone other than another small creditor. After 3 years, a small creditor portfolio QM can be sold to any entity and the loan will retain its fully-protected QM-status.
*Note: Just because you are a small creditor does not mean that you can only take advantage the small creditor QM category. Small creditors can also originate “regular” and GSE-eligible QMs and sell those to whomever and whenever they please. However, in that case, the small creditor will need to meet the full requirements if originating loans under these normal categories, e.g. strict 43% DTI limit.*
What about the 500 per year loan limit?
There are two options available to small creditors that are worried about the 500 per year loan limit in regards to retaining their small creditor status for QMs (as an alternative to arbitrarily cutting off lending at 500):
A small creditor could buy closed loans–those loans would not count towards the 500 limit. This will depend on how hard lenders are working to remain a “small creditor”. Will a lender that could originate 750 loans per year originate only 500 to retain their small creditor QM status? If you had the option to buy 250 loans instead of originate them, this might be possible
*Note that a small creditor cannot purchase a non-QM and transform it into a QM…a QM has to be originated as such.*
A small creditor could also attempt to keep its small creditor status by acting as a broker on some loans. The 500-limit only includes loans that you close (this is why buying is an option).This may be an interesting option for lenders frustrated with rising LO compensation and decreasing production.
*Note: We had hoped the regulators might increase the 500 limit. Unfortunately, that does not appear likely. At least not anytime soon.*
Obviously, in times like these financial institutions are increasingly reluctant to originate non-QM loans due to the lack of protections available in the event of default and/or a regulatory investigation. Indeed, we have seen many of our clients with policies only to originate QM loans. What we have also seen is institutions not taking advantage of all of the protections afforded to them due to their small creditor status. Are you a small creditor? If so, are you taking advantage of your small creditor QM status? If not, you probably should be.
“Everything that’s really worthwhile in life usually involves some degree of risk.” – Richard Branson
I hope this article was helpful. In the event you have any questions or would like to talk about other compliance issues you are facing, please feel free to contact me. I’d be happy to help.
Talk to you soon,Colin C. Quillinan, Esq. SPILLANE CONSULTING ASSOCIATES, INC. 501 John Mahar Highway, Suite 101 Braintree, MA 02184 781 356-2772 781 356-2837 (fax)