We are one of the lucky small/rural lenders that are exempt under QM.

However, are we still REQUIRED to somewhat follow ability to pay? Maybe not to the letter, but verfying income, verifying credit, etc.

Thanks

Exempt from what? - Appendix Q, Balloon Loan exemption??? You still have to prove that the applicant can afford the loan.

Certainly we are following all the required product loan characteritics, etc. It's the underwriting portion I'm trying to get more clarification about. We wouldn't be required to follow Appendix Q as in the Standard QM, but rather we'd follow the Small Creditor Balloon QM.

I'm concerned about our lack of underwriting, lack of income verification, etc. I can't clarify if because we fall under the Small Rural Lender QM, that as long as long as the loan product meets the requirements, we're OK.

However, I'm darn sure we aren't....because there is the additional layer of underwriting, which we aren't doing very well (documentation, credit history, or proving affordability with DTI.

Here's a nice handy dandy CFPB chart.

http://files.consumerfinance.gov/f/201404_cfpb_atr-and-qm-comparison-chart.pdf

You are correct, JRN. You must still verify income, have policies for acceptable DTI, even though you are not necessarily held to 43% (ours is 45%, for instance) and basically demonstrating your due diligence on showing that a borrower has the capacity to repay a loan.

Your next criteria is meeting (or not) the QM piece which would be acceptable terms based on your product, such as a 61+month balloon, etc.

ATR and QM are two distinct and separate rules/qualifiers. I explain it pretty much like this:

ATR is a regulation...a rule...we must adhere to.

QM is an added layer of litigation protection.

We mainly do Small Creditor QM's. The regulation states a tax return may be used to verify the income, but it doesn't dictate how many years we have to obtain. Our in-house policy states we should get 2 years of taxes for self-employed borrowers. Because of our in-house policy do we need to get 2 years in order to qualify a loan as a Small Creditor QM? I'm interested in hearing everyone's thoughts. Thanks!

For ATR, I would say you need 2 years on taxes, or 1 year and a ytd . Keep in mind if you obtain ytd (this far in the year) they need to be prepared by a 3rd party.

Although you don't have to adhere strictly to Appdx Q, you should follow similar procedures.

IF they show the ATR, then your next step is; do your terms qualify for QM. If so, you meet that part of the two-prong test.

Ok sounds good. Thanks for the input!

Can you please give me the specific citing for the ability to repay balloon loan requirement? It has been a while since I looked and I am getting questions about why we do not want to do a 3yr balloon for residential mortgages.

Your help is appreciated.

We are under 2 billion in assets and originate less than 2,000 loans per year. However, we sell most of our mortgage loans on the secondary market and I'm quite sure the investors will want them to comply with Appendix Q. Does this new small creditor rule benefit us in any way?

It could provide you some flexibility in escrowing HPMLs.

1026.43(c)(5)(ii). It requires you to verify the borrower's ability to repay the loan, including the balloon payment amount, if the final payment is due within 5 years of the first payment date. That might work for some very small loan amounts, but how can you demonstrate that a borrower has the income or assets to repay that balloon payment? It ain't happenin' in most cases.

That is why balloon notes need to be for at least one month more than 5 years.

We do ours for 62 months for this reason. We went with 62 'just in case' someone wanted 45 days between their loan and the first payment. In a community bank you just never know.

Ditto. 62 mos here.

Our bank too is under 2 billion in assets and originate less than 2,000 loans per year. We also periodically sell loans to Freddie Mac which sometimes must be escrowed. We have escrowed HPML loans on our books now. I was confused by the new escrow exemption. Does the new exemption mean we would no longer have to escrow for future HPML loans even if we still might have to escrow for a new Freddie Mac loans. (sorry that was confusing) thanks

With the change to small creditor definition from in a rural to not in an urban area, how can I find out what is considered urban?

Thanks

It seems that this section only applies to HPML loans. If the interest rate spread was under the "Small Rural Lender" threshold would we then NOT be required to consider the balloon payment as part of ATR?

A loan with a balloon payment, as defined in § 1026.18(s)(5)(i), using:

1. The maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due for a loan that is not a higher-priced covered transaction; or


2. The maximum payment in the payment schedule, including any balloon payment, for a higher-priced covered transaction;

How do you arrive at the conclusion that it only applies to HPMLs?

Bullet 1) mentions a five year scope of payments WITHOUT mentioning the Balloon payment and bullet 2) mentions the Balloon payment but ends with "for a higher-priced covered transaction".

Well, a higher priced covered transaction (HPCT) is not necessarily an HPML. There are two separate definitions for those terms. An HPCT is defined in section 1026.43 and an HPML in 1026.35. Many compliance violations are caused by failure to take definitions into account.

I just don't see the difference in the definitions. I get that the HPML definition specifically describes a "closed end" loan and I get that the HPCT means a "covered transaction" but there is no material difference derived with my limited English skills.
(see below)


Higher-priced covered transaction means a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, other than a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; by 3.5 or more percentage points for a first-lien covered transaction that is a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more percentage points for a subordinate-lien covered transaction.


(1) "Higher-priced mortgage loan" means a closed-end consumer credit transaction secured by the consumer's principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set:
(i) By 1.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac;
(ii) By 2.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; or
(iii) By 3.5 or more percentage points for loans secured by a subordinate lien.

1. An HPCT must first be a "covered transaction" as defined in 1026.43(b) which is an open-end or closed-end consumer credit transaction secured by a dwelling, with a detailed list of exemptions. The determination of whether the covered transaction will be a "higher priced covered transaction" (HPCT) is made by applying the APR over APOR comparison using a margin of either 1.5 or 3.5 percentage points depending upon loan characteristics other than loan amount, including whether the security is a first or junior lien. One of those loan characteristics is whether the loan is a QM that can be originated only by a small creditor.

2. An HPML is a closed-end consumer credit transaction secured by the consumer's principal dwelling, for which the APR exceeds the APOR by either 1.5 percent or 3.5 percent depending on loan amount and whether the security is a first lien or junior lien.

If we remove Jumbo Loans from this discussion. Is it safe to say an HPCT may not be an HPML but all HPMLs would also be an HPCT?

Thank you for your patience and guidance John. This website is a valuable resource.

Yes, it would appear so.