Why Expanded QM Exemption for Small Lenders Doesn’t Go Far Enough

The Consumer Financial Protection Bureau’s recent change to the definition of small creditor, while seemingly poised to make room for products outside the Qualified Mortgage boundaries, actually amounts to drops in the bucket in regards to non-Qualified Mortgage lending and is unlikely to facilitate the widespread use or securitization of non-QM products. To be recognized as a small creditor, an institution previously had to originate up to 500 loans annually. The bureau’s finalization of the rule now extends the definition to companies with fewer than $2 billion in assets that originate fewer than 2000 loans annually. The impact of this extension means that more institutions can take advantage of making otherwise non-QM loans and obtaining QM protection by holding such loans in portfolio. Of course, it is this last element — holding the loan in portfolio — that inherently limits the impact of this change to the Ability-to-Repay rules. Indeed, such loans will only be able to be made as QM loans if and to the extent the institution has the wherewithal to be able to hold such loans in portfolio for at least three years. First, smaller institutions may have limited appetite for risk and because of their small size will have certain challenges maintaining sufficient liquidity while holding large numbers of these loans for extended periods. Smaller lenders could also face serious problems if they needed to sell these loans prematurely, as the loans would suddenly lose their QM status. As such, small lenders meeting the small creditor exemption are unlikely to push the limits beyond the safest of non-QM loans — those with lower debt-to-income ratios, lower loan-to-value ratios, and any made to borrowers with substantial income and/or liquid assets and strong credit. Moreover, they are unlikely to originate large numbers of these loans and commit substantial liquidity long-term to holding these loans. Rather, for non-QM lending to increase and fill the void left by the ATR rules, lenders require assurance that as they increase the flexibility of non-QM products beyond the safest and most obviously qualified borrowers, sufficient protocols and precedents exist to ensure that the lender’s actions in approving the loan were in good faith. The adoption of standard practices across investors and lenders is the best tool to effectuate the expansion of non-QM lending.