CSBS Issue Briefings - January 2020

CSBS ISSUE BRIEFING

Qualified Mortgage/Safe Harbor

CSBS Official Position State regulators continue to support the principles that drive the Qualified Mortgage (QM) Ability-to- Repay (ATR) rule but have made several recommendations that would better tailor the rule commensurately to the community bank business model. CSBS supports a Safe Harbor for all mortgage loans held in portfolio by community banks. Summary A qualified mortgage refers to a mortgage that fulfills the ATR requirements as set out by the Consumer Financial Protection Bureau’s rule. As of January 2014, banks were granted protection from consumer litigation if their loan fulfilled the QM requirements. • Points and fees are less than or equal to 3% of the loan amount (for loan amounts less than $100k, higher percentage thresholds are allowed) • No risky features like negative amortization, interest-only, or balloon loans • Maximum loan term is less than or equal to 30 years. In total there are currently three main QM categories: • General QM Loan – any loan that meets, in full, the QM mandatory feature requirements specified above with greater than or equal to 43% DTI ratio. • GSE Eligible – under the GSE patch, any loan that meets the QM feature requirements and is eligible for purchase, guarantee, or insurance by a GSE, FHA, VA or USDA is a QM, regardless of whether it is above the 43% DTI ratio threshold 1 . • Small creditor –Mortgage originations held in portfolio by federally insured banks and credit unions under $10 billion dollars in assets. 2 Why it Matters to State Regulators The community bank business model relies on social capital, or relationship lending. Because community banks are often located in rural communities and have a smaller customer base, expanded qualitative data is taken into consideration throughout the lending process. It can be a challenge for small community banks to originate mortgage loans that fit inside the QM standard, often because the markets in which they do business require more flexible underwriting. Community banks are also more likely to hold originated loans in portfolio, compared to their larger counterparts that typically focus on standardized mortgage products and routinely sell their mortgage loans on the secondary market. When mortgage loans are held in portfolio, the interests of the borrower and lender are aligned because the lender is fully incentivized to ensure the borrower can meet the monthly obligations of the mortgage. All QM loans must have the following mandatory feature requirements:

1 FHA allows up to 57% DTI but not all of the loans may be at the GSEs are within FHA conforming loan limits 2 The Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) adjusted the small creditor QM category. Before S.2155, the threshold was $2 billion in assets and 500 or fewer first mortgages per year .

FOR STATE REGULATOR USE ONLY