Optimizing your Underwriting Efficiencies

The financial housing crisis in 2008 was one of the worst economic events to happen since the Great Depression.

The lack of checks and balances to ensure potential homeowners could repay their mortgage loans led to the market collapse and forced the government to enact several new regulatory requirements to stabilize the mortgage lending industry.

The Dodd-Frank Act was passed in 2010 to help protect consumers from predatory lending practices. Part of the act included the adoption of ability-to-repay (ATR) requirements for different types of qualified mortgages (QMs). A final rule for ATR/QM provisions was passed in 2013, but an amendment to the rule was made in March of 2021, with mandatory compliance effective October 1, 2022.

The recently amended ATR/QM rule made changes to the General QM definition, eliminated the temporary Government-Sponsored Enterprise (GSE) QM, and added the Seasoned QM. Below highlights the final rule changes and how they help lenders and creditors be more efficient, along with what is staying the same for each type of QM.

General QM

A General QM is one in which a lender makes a good-faith effort to ensure a borrower can repay their loan on time. The following changes were made to General QMs under the amended final rule that should help lenders and creditors:

• Removing the 43% debt-to-income (DTI) cap. This allows underwriters to mitigate higher DTIs to make more QMs than in the past. This can benefit applicants such as fixed income borrowers (who have assets to compensate the risk) and self-employed borrowers.
• Creditors no longer need to follow Appendix Q. Lenders can develop their policies to permit some flexibility compared to the previous requirements of validating the underwriting requirements (apart from the secondary market rules, which are still somewhat restrictive and specific).
• Providing higher thresholds for smaller loan amounts for certain manufactured housing loans and for subordinate-lien transactions. This is attractive for first-time home buyers and lowto-moderate income borrowers.
• Mandating that written underwriting policies and procedures be in place.
• Ensuring file documentation reflects how the policies and procedures were applied in determining a consumer’s ATR.

Lenders still need to consider and verify the consumer’s current or reasonably expected income, or assets (other than the value of the dwelling and attached real property that secures the loan), debt obligations, alimony, child support, and monthly DTI ratio or residual income.

Creditors can meet the rule’s verification requirement and obtain safe harbor by either satisfying this general standard or complying with the verification standards in one or more of the below specified manuals:

• Chapters B3-2 through B3-6 of Fannie Mae’s Single-Family Selling Guide (October 5, 2022) .
• Sections 5100-5700 of Freddie Mac’s Single-Family Seller/Servicer Guide.
• Section IIA.1 and II.A.4-5 of FHA’s Single-Family Housing Policy Handbook 4000.1 (September 14, 2019).
• VA Pamphlet 26-7, Revised Chapter 4 (February 22, 2019).
• Chapter 4 of USDA’s Field Office Handbook for the Direct Single-Family Housing Program (December 19, 2019).
• Chapters 9 of USDA’s Handbook for the Single-Family Guaranteed Loan Program (March 19, 2020).

Seasoned QM

Under the amended final rule, Seasoned QMs were added as an additional QM type. A Seasoned QM is a first-lien, fixed-rate loan that has not had more than two 30- day delinquencies and one 60-day delinquency during the 36 months referred to as a seasoning period. The seasoning period begins on the date on which the first periodic payment is due after consummation, and ends in the later of two situations:

Situation 1: If there is a delinquency of 30 days or more at the end of the 36th month of the seasoning period, the seasoning period is extended until there is no delinquency. Payments are considered 30 days delinquent if not paid before the next payment due date.

Situation 2: The time spent in a temporary payment accommodation, extended in connection with a disaster or pandemic-related national emergency, does not count toward the seasoning period, provided that during, or at the end of the temporary payment accommodation, there is a qualifying change, or the consumer cures the loan’s delinquency under its original terms.

Seasoned QMs allow creditors to get fixed-rate mortgage loans (which typically don’t have a large margin or spread) off their books as soon as 36 months after their first scheduled payment, instead of having to keep them in their portfolio for as long as 30 years or until they’ve been paid off. This allows creditors to retain higher margin loans (like commercial loans) in their portfolio and increase their bottom line.

Seasoned QMs must follow these general requirements:

• Regular, substantially equal periodic payments that are fully amortized.
• No negative amortization, interest-only payments, or balloon-payment features.
• No terms that exceed 30 years.
• No points or fees that exceed the specified limits.
• Fixed-rate loan and secured by a first lien.
• No high-cost mortgages [defined in Regulation Z, 12 CFR 1026.32(a)].
• Satisfy the consider-and-verify requirements under the revised definition for General QMs.
• No more than two delinquencies of 30 or more days, and no delinquencies of 60 or more days at the end of the seasoning period.

Small Creditor QM and Balloon-Payment QM

No changes were made in the final rule for Small Creditor QMs and Balloon-Payment QMs. According to the final rule, a creditor is a small creditor if, during the prior calendar year the creditor and its affiliates together originated 2,000 or fewer first-lien covered transactions that were sold, assigned or otherwise transferred (with no limit on loans held in portfolio) and the creditor, together with its affiliates that regularly extend first-lien covered transactions, have less than $2 billion in assets (adjusted annually for inflation).

If a creditor meets the requirements to be considered a small creditor, a loan will qualify as a Small Creditor QM if:

• The creditor underwrites the loan based on a fully amortizing schedule using the maximum rate permitted during the first five years after the date of the first periodic payment, and does not contain a balloon payment, negative amortization, or interest-only features.
• The loan must not be subject to a commitment made at or prior to consummation of a loan to sell the loan after consummation, other than to a creditor that itself is eligible to make Small Creditor QMs.
• The creditor must consider and verify the consumer’s income or assets, debts, alimony and child support.
• The creditor must consider the consumer’s DTI ratio or residual income, although the Small Creditor QM definition sets no specific threshold for DTI ratio or residual income.

In addition, small creditors that are in rural areas can also issue Balloon-Payment QMs, which must satisfy the following criteria:

• The loan must have a fixed interest rate and periodic payments (other than the balloon payment) that would fully amortize the loan over 30 years or less, and does not contain interest-only or negative-amortization features.
• The loan must have a term of five years or longer.
• The loan must not be subject to a commitment made at or prior to consummation of a loan to sell the loan after consummation, other than to a creditor that itself is eligible to make Balloon-Payment QMs.
• The creditor must determine that the consumer will be able to make the scheduled periodic payments (including mortgage-related obligations) other than the balloon payment. Unlike the calculation of balloon loan monthly payments for determining ATR, the BalloonPayment QM calculation excludes the balloon payment even if the loan is a higher-priced loan.
• The creditor must consider and verify the consumer’s income or assets, debts, alimony and child support.
• The creditor must consider the consumer’s DTI ratio or residual income, although the BalloonPayment QM definition sets no specific threshold for the DTI ratio or residual income.
• At least one of the organization’s first-lien covered transactions in the prior year is secured by a property in a rural or underserved area.

ATR/QM Training Solutions

BAI has almost 100 years of experience in the financial services industry. We have worked with over 2,300 banks, credit unions, and other financial institutions to help them improve their compliance programs. Understanding the ATR rules for each QM type is important for lenders to properly issue loans. BAI’s training solutions can help lenders know what is required of them and the mortgage applicant to properly issue a loan that the applicant can realistically repay. For more information on how BAI can help improve your ATR/QM training programs, visit here: info.bai.org/contact-bai.