Certain Small Creditor QM features, such as DTI or Residual Income, are simply "consider and verify". Internally we set a DTI at 50% for portfolio loans but even that is contingent on there being enough residual income. We will approve a loan with a higher DTI if the residual income is reasonable. My question is this - Does having an internal criteria where the rule simply states to consider and verify negate being able to consider the loan as a Small Creditor QM when the internal criteria is exceeded?

It allows a creditor to set their own limits, but if you set limits and then violate them, how are you going to explain that to a judge?

Because making an exception for someone with a 52% DTI but has $50,000 annually in residual income may be reasonable since they can pay the debt and still live, whereas lending to someone with a 50% DTI but only has $3.000 annually in residual income could be putting someone in a loan they really can't afford and pay for their day to day living expenses.

It has been our experience that DTI is not a cut and dry underwriting factor since we consider residual income also. Our aim is not to put someone in a loan they cannot afford and will cause them difficulty to cover their living expenses.

I don't think an exception to policy would get you kicked out of safe harbor. That would lead to some pretty perverse incentives in setting underwriting criteria. The same loan to a bank with looser credit standards would get safe harbor?

I am not sayin you can't use residual income to qualify, as it is specifically allowed for a SCQM:

2. Debt-to-income ratio or residual income. Section 1026.43(e)(5) does not prescribe a specific monthly debt-to-income ratio with which creditors must comply. Instead, creditors must consider a consumer's debt-to-income ratio or residual income calculated generally in accordance with § 1026.43(c)(7) and verify the information used to calculate the debt-to-income ratio or residual income in accordance with § 1026.43(c)(3) and (4).

What I am saying is that you should have an established policy as to what is acceptable regarding both of those factors if you choose to rely on both of them for underwriting purposes. Then violations of policy could lead down a number of bad roads, i.e., fair lending, QM challenge, etc.