The Consumer Financial Protection Bureau's Ability-to-Repay and Qualified Mortgage regulations became effective on January 10, 2014. As credit unions finalize implementation, they must clearly document the legal risks in their qualified mortgage (QM) strategies. Each credit union's mortgage lending program will face different risks and detailed documentation will pay dividends during future audits and examinations.
Four Types of Qualified Mortgages
The regulations contain four avenues for a credit union to obtain qualified mortgage status for a particular loan:
- General Qualified Mortgage;
- Temporary Qualified Mortgage;
- Small Creditor Portfolio Qualified Mortgage; and
- Small Creditor Balloon-Payment Qualified Mortgage.
Each type comes with its own underwriting criteria and nuances. For example, the 43% debt-to-income cap applies to General Qualified Mortgages but does not apply to Small Creditor Portfolio Qualified Mortgages. Credit unions should be tracking not only whether a particular loan is a qualified mortgage, but also what type of qualified mortgage. By tracking the specific details, credit unions will be better able to demonstrate the legal risks in their mortgage lending programs.
Safe Harbor Versus Rebuttable Presumption
Qualified mortgages provide credit unions with a presumption of compliance with the ability-to-repay rules. However, the level of legal protection depends on whether the qualified mortgage is considered higher-priced or not. Qualified mortgages that are not higher-priced receive a "safe harbor" while qualified mortgages that are higher-priced receive a "rebuttable presumption" of compliance. This distinction is crucial as it determines the burden of proof if a credit union's underwriting was challenged in court.
Determining Higher-Priced Status
For the General QM and Temporary QM categories, a mortgage is higher-priced if the annual percentage rate (APR) exceeds the "average prime offer rate" (APOR) by 1.5 percentage points or more for first liens or by 3.5 percentage points or more for subordinate liens. Qualified mortgages meeting this test would be higher-priced and obtain a rebuttable presumption of compliance. Qualified mortgages that are not higher-priced would receive the safe harbor protection.
Credit unions that meet the "Small Creditor" test have the ability to obtain safe harbor protection for a larger number of qualified mortgages. For both of the Small Creditor QM categories, a mortgage will be higher-priced if the APR exceeds the APOR by 3.5 or more percentage points for both first liens and subordinate liens. Thus, credit unions who meet the "Small Creditor" test can receive safe harbor protection for any first lien qualified mortgages where the APR is less than 3.5 percentage points above the APOR.
By clearly documenting the legal protection available for each type of mortgage loan, credit unions will have a better understanding of their overall risk.
Of course, credit unions are able to make non-qualified mortgages so long as they adequately evaluate and manage the associated risks.
Clear documentation of what type of qualified mortgage the credit union made—and the level of legal protection—will help the credit union demonstrate compliance with the ability-to-repay requirements and position the credit union to address any potential legal challenges. Further, this documentation will help credit unions track their mortgage lending programs to help analyze whether their legal risks are increasing or decreasing over time.