With a new administration in White House, it is likely mortgage lenders will need to adjust to some regulatory changes on the federal level over the next year or so.
In addition, certain key regulatory changes that were already in the works have recently taken effect, including the new URLA, as of March 1, and the new QM rules recently introduced by the Consumer Financial Protection Bureau, which may get changed yet again under the new leadership in D.C.
So how should mortgage lenders be setting their regulatory priorities for 2021? To find out MortgageOrb recently interviewed Melissa Kozicki, director of compliance at Accenture, and Tom Paulett, principal product manager at Mortgage Cadence.
Q: Where should lenders’ regulatory priorities be focused as we begin 2021?
Kozicki: This year will be an interesting one for the mortgage industry. Over the course of last year, the industry saw more changes and new rules than it had in quite some time. This shake up of the economy continues to have lasting effects on the industry from a regulatory standpoint.
The first few months of 2021 will bring quite a bit of change for lenders. Working with a new loan application form and new QM requirements will certainly cause lenders to step back, reassess how they are working and ultimately adapt.
For most, change can be intimidating. It is hard to know where or how to start. Rather than viewing these changes as a challenge, they should be seen as an opportunity to improve and optimize. With the right resources at your disposal, getting started is easy – and getting started early can be a competitive advantage that puts you ahead of the curve.
Q: What is unique about URLA and how should lenders prepare?
Paulett: The new URLA will be required beginning March 1, so there are a lot of things lenders should be doing to get ready right now. Many lenders are already using the new URLA, so it is crucial that those not yet using it do not fall behind the curve.
Getting started can be intimidating, but there are resources available to help. Resources are available on the websites of both Fannie Mae and Freddie Mac. They can help lenders prepare and get started. It is likely that your LOS provider has resources available, too.
One way to get started is by taking a test loan through the new application from start to finish. Note where any changes or potential hang-ups may be. You know your workflow best, so now is the time to compare the old with the new and make sure you are ready to make a smooth transition.
If you use third party vendors for you LOS, doc prep, or borrower portal, it is important that you do your due diligence and ensure they are also ready. These services should be certified with the GSEs if running an automated underwriting system (AUS). Be sure you are updating your documentation and processes to fit with the changes and, as mentioned before, test your specific workflow through those systems.
While there are no planned changes right now, the GSEs are very responsive to industry feedback and may adjust to address issues that were not found during the testing and limited production period. Be prepared to adapt to any changes that may arise and continue to test and adjust where needed.
Q: How should lenders approach the new QM rules? What can they do to prepare?
Kozicki: The Regulatory Freeze memorandum issued by the President on January 20th could impact the new QM rules. The President has directed agencies to consider postponing for 60 days and opening a new 30-day comment period with respect to rules published in the Federal Register that have not yet taken effect, therefore the CFPB is likely to reconsider the QM rules.
However, a new General QM definition is expected to go into place substantially similar to the existing rule, so lenders should continue to prepare for this change.
There are three new rules that lenders must be aware of. First, the general QM definition has been updated to eliminate the 43% max debt to income (DTI) ratio requirement, eliminate Appendix Q, create a new price-based test for determining general QM status, and modify the existing QM safe harbor test. This new definition goes into effect on March 1, 2021 and is mandatory for applications taken on or after July 1, 2021.
Next, the QM patch, which allows lenders to obtain QM status if their loan is eligible for purchase by Fannie Mae or Freddie Mac regardless of the loan’s DTI, has been extended until the new general QM definitions become mandatory on July 1, 2021.
Finally, a new type of QM called Seasoned QM will provide a path for non-QM and rebuttable presumption QM loans which meet certain criteria to become Safe Harbor QM loans after complying with performance requirements within the lender’s portfolio for three years. This also goes into effect March 1, 2021.
When learning about these new QM rules, there are some common misconceptions. Many people assume the new general QM definition means that DTI no longer matters. Keep in mind that the 43% limitation has been eliminated, but creditors must still consider the DTI in making their underwriting decision. Many also assume that the elimination of Appendix Q means they can underwrite loans however they want. While the rule introduces greater flexibility in underwriting, lenders are still required to “show their work” and to verify income, assets and obligations.
It is also a common misconception that the new Seasoned QM rule will allow any loan to achieve a presumption of compliance (i.e. safe harbor). However, only a first lien, fixed-rate, fully amortizing loan will be eligible, and the loan must meet the points and fees limitations.
Additionally, the underwriter must have considered and verified income, assets and debts.
Even so, this new category of QM is a great opportunity for creditors who hold some of their loans in portfolio because they can now obtain safe harbor status even if the loan is a higher-priced covered transaction or even a non-QM loan. The CFPB is hoping this new type of QM will encourage meaningful innovation and lending to broader groups of creditworthy consumers, especially those with less traditional credit profiles.
Keep in mind that the revised regulation applies only to transactions for which the creditor has received the application after the effective date of the rule itself. So, loans currently in your portfolio are not eligible for Seasoned QM status.
Finally, it is important to understand if or how these new rules will impact government loans like FHA, VA or USDA loans. The rule has been modified to indicate that a covered transaction is a QM as defined by HUD, VA or USDA, so the changes just remove the temporary Agency patch that applied to loans eligible for Fannie Mae and Freddie Mac but leaves the other government agencies to continue to define their own QM.