QM vs Non-QM Loans

My lender keeps asking what are the implications for putting non-QM loans on the books. I keep telling him that non-QM loans are okay - but you need to verify and consider the 8 ATR factors and you have no protections when it comes to borrower ATR claims or defenses.

He keeps coming back with "but what are the implications"
I get the feeling that he thinks non-QM means he doesn't have to follow Ability to Repay. Am I correct in that ATR does apply (just not the 43% DTI)?

I'm at a loss..How else can I explain this to him.

I've described it to a few folks as follows:

ATR rules are new and must be adhered to.

QM is a special instance of ATR (several, technically) that suggests very, very strongly that you followed the ATR rules (e.g. reduces your obligation to prove it, if it's ever suggested in court that you failed to).

Failing to follow the ATR rules is not an (compliant/safe & sound/good) option. It's literally forbidden.

That (admittedly oversimplified) explanation has helped get it across to a few of my colleagues. Hope it helps you.

This is from an American Banker's Assoc summary document. Maybe this will help with "implications".

Violations of the ATR Rule. Under TILA, a borrower who brings an action against a lender for a violation of the ATR rule within three years from when the violation occurs may be able to recover special statutory damages equal to the sum of all finance charges and fees paid by the borrower, unless the lender demonstrates that the failure to comply is not material. This recovery is in addition to: (1) actual damages; (2) statutory damages in an individual action or class action, up to a prescribed threshold; and (3) court costs and attorney fees that would be available for violations of other TILA provisions. After the expiration of the three-year time period, the borrower is precluded from bringing an affirmative claim against the lender. At any time, when a lender or assignee initiates a foreclosure action, a borrower may assert a violation of these provisions “as a matter of defense by recoupment or setoff.” There is no time limit on the use of this defense, although the recoupment or setoff of finance charge and fees is limited to the first three years of finance charges and fees paid by the borrower under the mortgage.
Silver,

1026.43 makes it pretty clear that you have to comply with ATR/QM. It's Regulation Z, so your lender can look to the penatlies under TILA for "implications," plus the implications in court as brownbeard suggested.

I agree with all above.

QM is just a way of complying with the ATR requirements.

ATR is what MUST be complied with.

I have a feeling it would be especially frowned upon if you are knowingly ignoring the ATR rules.

How about this for a comeback to your lender:

"What are the implications? For you, knowing failure to adhere to the ATR requirements will mean a loss of income, because you'll be canned."

As part of my ATR/QM training, the Chief Credit Officer told me to tell our lenders - "If you can't comply with these rules and obtain all the necessary documentation, you will be looking for work elsewhere." We don't do a lot of QM loans in house - Our Mortgage division does those. Most of our In-house loans are simply ATR and non-QM.

Balloon Loans - I know that the ATR/QM rule as No balloon loans, except Small Creditors can continue to make them for 2 years and then the rural and underserved definitions kick in.

But can any creditor continue to make non-QM balloon loans after Jan 10, 2016?

You can make a non-QM balloon now as long as it is also not an HPCT and the term is 61+ months (must factor in highest payment during 1st five years after first payment date.)

That part is not set to expire... who knows what will change between now and then though.

So is it safe to say, QM = ATR + 43% DTI; Non-QM = ATR with no DTI restrictions? and Non-QM Balloons that are not HPCT can be done now and until they change the rule again?

The only constant is ATR and if you don't comply with that, ......

ATR is what must be complied with. You can develop your own criteria to underwrite the loan, but it must consider the 8 factors listed in 1026.43(c)(2)i-viii

Originating a QM grants you safe harbor (or rebuttable presumption for HPCT's) of compliance with the ATR rules. There are , of course, more hoops to jump through to originate a QM than general ATR though (Appendix Q etc).

Not really. You must comply with ATR. One way to do so is to make a QM. There are several ways to make a QM, and only one of them has a DTI restriction.

A QM either comes with a rebuttable presumption or a safe harbor to the claim that that you failed to comply with ATR.

So for a Non-QM loan, there is no "assumption" that you have complied with the ATR - you must DOCUMENT that you considered the ATR factors. And there is no safe harbor or rebuttable presumption with Non-QM loans. Correct?

Do balloon loans completely go away for everyone except sm creditors in rural and undersereved areas after Jan 10, 2016?

Only if you want it to also be a QM. And only if they don't extend that temporary inclusion.

Oh..as far as those first questions are concerned...right.

Having said that, Joanne...for QM loans, you would still have to document ATR.

Here's what i've never quite got my head around in the ATR vs. QM discussion......certain QMs get a safe harbor (i.e., you're assumed to have complied with ATR)....the only way to get a QM is to actually comply with ATR....so a QM that's an actual QM (and not a QM because the bank thinks it's a QM, when in actuality, because of errors in the process, it's really not) and a loan that simply follows ATR correctly are really the same thing: loans that a bank should be safe from litigation on. It just seems like semantics to me.

To add to that: a court isn't just going to take the bank's word that it's a QM....so how exactly does this safe harbor work?

Bank: "Your honor, this is a qualifed mortgage."
Judge: "Sorry plaintiff...it's a qualified mortgage...no need to check the bank's ability to repay work to see if it was done correctly."

And if that's not the case, then again, how exactly does having a QM trump ATR? Both involve: correctly calculating that your borrower has the ability to repay the loan. Do that, and you should be good. Don't do that, and regardless of whether you claim the loan is a QM or not, you're in trouble. That's the way i see it anyway. I'll gladly recant if someone points out the error in my logic.

It is all just to throw us bankers a bone until some enterprising attorney and plaintiff decides it is time to litigate. Then the whole "safe harbor" gets thrown out and we're back to square one like we were before these rules - albeit with less hair and/or more gray hair.

Exactly.....i just don't see where the bank claiming QM status really matters. The heart of the matter is either you correctly calculated the ability to repay or you did not. Attaching a label to a loan seems ultimately meaningless. A loan that only follows ATR (but follows it correctly) is ultimately a "QM", because the borrower loses his lawsuit. And a "QM" that isn't really a QM doesn't get you anything.

Exactly. With a QM, the burden is on the borrower to prove otherwise.

To be a QM, you can't have any risky features (unless you are rural or temporary and then you can make balloons)...but other than that, it's nothing but a glorified ATR. You can still be in compliance with ATR, but not have to fit the loan into the perfect peg and give it the title "QM".

Joker..i think this is what i'm getting at. Who says whether it's a QM or not? The bank states to the court that it's a QM, so it's a QM? I get the fact that whomever has the onus to prove something has the tougher time, but is a court really going to say "well, the bank says it's a QM, so borrower, it's on you to disprove that". Wouldn't the plaintiff's lawyer start with the premise of "your honor, we dispute the fact that this loan is a QM". I mean, how do you start with the stipulated fact that a loan is a QM, simply because the bank says it is?

And by dismantling things to prove whether the loan truly is a QM, aren't they going to look at..................ability to repay? So where's the "safe harbor"?

so in the end, what is the difference between a QM loan and Non-QM loan? (that is what my lender wants to know).

In a perfect world, if both truly follow the repayment requirements of Sec. 43, i would think nothing. But i have no idea how to predict litigation risk and how these things will actually play out in a court of law.

IMO, if you went through everything to document the file as a QM the borrower would basically have to admit to mortgage fraud if they say they didn't have ATR.

I agree, if you did it correctly. But is every loan that has the label "QM" on it this year going to truly be a QM that follows all the requirements of Sec. 43?

What's the saying about lipstick on a pig?

Right. I just think the QM/non-QM thing is kinda circular.....it's a QM IF you followed ATR...and if you followed ATR, it really doesn't matter if it's a "QM" or not..at least it shouldn't.

Isn't following ATR mandatory to be in compliance with Reg Z?

Doesn't the only difference between QM and Non-QM boil down to DTI (43% for QM, no limit for Non-QM)?

(I am so confused!!)

JoAnne....i should have pointed out, i'm coming at this from the angle of a rural/underserved and small creditor, so the 43% DTI figure is not a player for me.

Yes, following ATR is mandatory, which is what i've been basing my posts on. Sorry...didn't mean to derail your thread and lead to any confusion.

You have to follow ATR. Period. That's what you must do.

Originating a QM is one way to follow ATR. If you don't like the QM underwriting requirements ( limits on points and fee, DTI thresholds, appendix Q, etc ) you can come up with your own criteria as long as it considers the 8 factors listed in .43.

As I am reading all the comments, and looking back at training I took in 2013, and reading notes, etc., I think I am finally getting it. Non-QM (or General ATR as I have seen it referred to), is basically underwriting as it has been with the added "documentation" and "verification" of ATR. Lenders can continue to do ballon or interest-only loans as long as they consider and verify 8 ATR Underwriting factors. There are no points and fees limits, no DTI or Residual Income limits, other than to consider and verify.

The implications of the Non-QM (or General ATR) loan vs the QM loan is that their is no safe harbor or rebuttable presumption of compliance with the ATR rules for the Non-QM/General ATR loans. For Non-QM/General ATR the burden of proof is on the lender.

Are these all true statements?

Assuming your bank was considering the 8 factors of ATR all along, I'd say you've got it.

JoAnne,
I may get shot for this. JMHO, if you follow ATR, you do have a "rebuttable presumption of compliance". There may be no "safe harbor" that you get with QM to shield yourself. You may have to prove the ATR documentation in court to win the point, but this is rebuttable presumption as long as you follow the 8 factors.

I think that is a fair statement, hgliii.

Thanks, I am in process of updating the ATR from CFPB in January and that is what I am taking from the guide. We had set everything in procedures in December. Now just trying to fine tune.
I'm sure when I get it completed, they will change it again.
I feel like my dog chasing its tail. Everytime I get close the tail changes directions.

"so in the end, what is the difference between a QM loan and Non-QM loan? (that is what my lender wants to know)"


Hi JoAnne-


If a loan is "Non-QM," the creditor must (for minimum compliance) consider the potential borrower's ability to repay using the 8 factors to be taken into consideration. In order for a creditor to receive "presumption of compliance," they are required to meet 6 requirements (Under the General QM)-

To be considered a General QM:
1. Have substantially equal periodic payment that do not result in principal deferral, a balloon payment or negative amortization;

2. Have a loan term of 30 years or less;

3. Be underwritten using a monthly payment calculated in accordance with the specific section of the Rule (potentially a different calculation than ATR)monthly related obligations and the monthly payment on a simultaneous loan calculated under the Rule;

4. Have points and fees that do not exceed the applicable points and fees tier under the Rule;

5. Have a DTI of 43% or less, calculated in accordance with Appendix Q; (not applicable to GSE's "Special Rules QM")

6. Have applicant income, assets, debt, obligations, etc. that are verified in accordance with Appendix Q and the General Ability to Repay Test.

If the loan meets all of the 6 aforementioned requirements, and is not an HPML, than the loan creates a "conclusive" presumption of compliance, or Safe Harbor. Whereas, if the loan meets the 6 requirements and is an HPML, than it has a "rebuttable presumption in which the borrower has a legal right to challenge the presumption of compliance. As the entire conversation above states by the experts, how litigation proceedures will start will be an entire different issue. My employer only writes to Special Rules (or Temporary QM) and General QM so I am not familiar on the other 2 QM's allotted by small creditors. I hope this helped. :-)

In a nutshell, General ATR has 8 (not 6) requirements and carries no presumption of compliance.

HPML has rebuttable and QM has conclusive compliance.