Only about 20 percent of todayâ€™s mortgage applications will pass muster with the new QM rule that takes effect January 10, according to a leading software platform used by lenders to comply with the Dodd-Frank Act and other federal rules and regulations covering mortgage lending.
The platform, ComplianceEase, analyzed the effects that the QM rules will have on current mortgage loans , finding that more than one in five loans originated today would not qualify for the QM Safe Harbor. Specifically:
- More than half of such loans have fees that exceed the new 3% points and fees threshold;
- Loans with fees that exceed the 3% threshold typically exceed it by nearly $1,500; and
- The rest have APRs that are too high to qualify for the safe harbor classification.
Loans that fail to comply with the QM rule will not be eligible for purchase, insurance or guarantee by government-sponsored enterprises (GSEs) or government agencies. Moreover, due to lack of marketability, lenders generally try to avoid originating loans known as “high-cost” loans, which are subject to restrictions in the Home Ownership and Equity Protection Act (HOEPA).
With new, stricter points and fees thresholds in the amended HOEPA, close to 3% of loans in the study that previously werenâ€™t HOEPA loans would move into the federal “high-cost” category. On average, those loans would exceed the new HOEPA points and fees threshold by more than $1,000.
“We simulated current lending patterns under the forthcoming rules. The results have given us a good idea of the impact that the new rules and, in particular, the new thresholds will have when January comes around,” said Jason Roth, CMT, senior vice president of Product Development at ComplianceEase.
As part of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) is implementing broad regulatory changes to require that mortgage lenders verify that borrowers have the ability to repay their loans. The QM designation offers an alternative to those provisions in exchange for tighter limits on fees, APR, and other terms of the loan. Starting in January, loans that arenâ€™t eligible for purchase, insurance, or guarantee by GSEs or government agencies must also comply with new underwriting standards.
Whether a loan is originated according to QM rules or the ability-to-repay provisions of Dodd-Frank, compliance requirements are both comprehensive and challenging. Lenders are especially concerned about non-compliance with the new rules because legal liability can potentially be assigned to their institutions and any secondary investors or servicers for the life of a loan. In all cases, lenders will need to retain detailed records of their process and their data to substantiate their findings, making technology a must in order to stay in compliance.
“Banking and mortgage executives need to evaluate their technology providers very carefully because the QM rule can create legal liability for the life of a loan,” said John Vong, CMB, CMT, president of ComplianceEase, “Weâ€™ve built our QM audits on a compliance platform that the industry has trusted for more than a decade. Itâ€™s easy to say that you have a QM compliance solution but our experience tells us that the devil is in the details.”