I. INTRODUCTION
The federal banking agencies (Agencies) have issued a statement to clarify safety-and-soundness expectations and Community Reinvestment Act (CRA) considerations for regulated institutions engaged in residential mortgage lending in light of the Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay and Qualified Mortgage Standards Rule (Ability-to-Repay Rule), that became effective January 10, 2014.
The CFPB’s Ability-to-Repay Rule requires lenders to make reasonable, good faith determinations that consumers have the ability to repay mortgage loans before extending such loans. The CFPB’s Ability-to-Repay Rule provides lenders with a presumption of compliance with the ability-to-repay requirements for loans that meet the regulatory definition of a “qualified mortgage” (QM). In accordance with the CFPB’s Ability-to-Repay Rule, a QM may not have certain features, such as negative amortization, interest-only payments, or certain balloon structures, and must meet limits on points and fees and other underwriting requirements.
The CFPB’s Ability-to-Repay Rule provides lenders with several ways to satisfy the ability-to-repay requirements, including making loans that do not qualify as QMs, referred to as “non-QM” loans. Please refer to the CFPB’s Ability-to-Repay Rule for a detailed explanation. (Also, see NBA Compliance Handbook, Vol. III, Real Estate tab, “Ability to Repay/Qualified Mortgages Rule” article.)
II. SAFETY-AND-SOUNDNESS EXPECTATIONS
The Agencies recognize that many institutions are in the process of assessing how to implement the CFPB’s Ability-to-Repay Rule. The Agencies emphasize that institutions may originate both QMs and non-QMs, based on their business strategies and risk appetites. Residential mortgage loans will not be subject to safety-and-soundness criticism based solely on their status as QMs or non-QMs.
Regardless of whether residential mortgage loans are QMs or non-QMs, the agencies continue to expect institutions to underwrite residential mortgage loans in a prudent fashion and address key risk areas in their residential mortgage lending, including loan terms, borrower qualification standards, loan-to-value limits, and documentation requirements. Institutions also should apply appropriate portfolio and risk management practices. Institutions should continue to comply with the applicable guidance on residential mortgage lending issued by their respective federal regulators.
III. THE COMMUNITY REINVESTMENT ACT AND FAIR LENDING
The Agencies recognize that some institutions may originate only or predominantly QMs, particularly when the CFPB’s Ability-to-Repay Rule first takes effect. In fact, the Agencies note that some institutions’ existing business models are such that all of the loans they originate satisfy the requirements for QMs.
As addressed in the Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule (See NBA Compliance Handbook, Vol. III, Lending tab for this article). The requirements of the CFPB’s Ability-to-Repay Rule and the fair lending laws are compatible. Similarly, the requirements of the CFPB’s Ability-to-Repay Rule and CRA are compatible. Accordingly, the Agencies that conduct CRA evaluations do not anticipate that institutions’ decision to originate only QMs, absent other factors, would adversely affect their CRA evaluations.
As required by the CRA, the Agencies assess institutions’ performance in helping to meet the credit needs of their communities, including low- and moderate-income neighborhoods, consistent with safe-and-sound operations. Each evaluation takes into account the unique performance context of the institution.