Navigating the New World Of Qualified Mortgages

At PRMI, we are excited about the long-awaited arrival of the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage/Ability-to-Repay rules (QM). We believe these new rules will allow us to help even more Americans pursue the dream of home ownership now that we have a clear line drawn in the sand of what is considered a quality (QM) and non-quality (non-QM) mortgage based on CFPB interpretation of the Dodd-Frank Financial Reform Act. By distinctly separating the two categories of mortgage-transactions based on consumer borrowing criteria, the new Qualified Mortgage rules will play a significant role in the interest rates and fees a consumer will recognize in the mortgage shopping process.

Most mortgage lenders will largely focus on serving QM borrowers, or only those who meet the more stringent government lending criteria. At PRMI, we see an opportunity to better serve all customer needs by providing products to consumers who don’t necessarily meet the QM standards, but who may still be able to demonstrate the ability to perform and repay a mortgage utilizing a Non-QM solution that properly considers their unique circumstances.

The QM rules were put into effect as a preventative action to protect against another housing finance crisis like the one that began in 2008. It also provides mortgage lenders legal protections from being sued by the consumer for extending a loan on which they are not performing when QM standards are met. Although the QM rules will have an impact on the industry by tightening the loan restrictions, it is my belief that Non-QM products will play an important role in the strengthening of the broader housing market, as new products allow for a greater number of consumers to access credit. In fact, the lack of mortgage-credit options today has been one of the major roadblocks preventing the housing market from a achieving a complete recovery.

Allow me to illustrate the limitations created by QM with a real example. After the housing meltdown, the loan qualification requirements tightened to the point where some well-deserving consumers were completely unable to qualify for a housing loan. For example, a consumer with a 760 credit-score, 30 percent down and seven years of successfully running a business found it much more difficult to get a loan than a consumer with a 600 credit score, 3.5 percent down and twelve months on the job. What’s the reason behind this discrepancy? The first consumer had written off too much of his/her income as a self-employed borrower (depreciation, investment in equipment, thus bettering the business, etc.), and in doing so reduced their adjusted gross income (AGI) to a point at which they don’t meet new income qualification requirements. But where did all of the money for such a large down-payment come from in the first place? Their hard work in operating a successful business! We can clearly see that a more in-depth investigation of the first consumer’s financial characteristics may very well prove him/her to be a less risky borrower. It certainly seems reasonable that this consumer shouldn’t be prevented from accessing mortgage credit.

With Non-QM, lenders will now have the ability to build new products to better serve their customer’s specific and unique needs. We will be able to offer more loan options to those who fall outside the stringent criteria of the QM realm (Although, Non-QM loans are still evaluated to ensure that the borrower has the ability to repay).

Living in a QM world does not necessarily limit the lending options as much as some naysayers have feared. The new rules do not condemn the mortgage industry to an atmosphere of negative growth and minimal risk-adjusted profitability. On the contrary! Regulators have afforded us the opportunity to establish a robust lending business in a significant part of the market—one that has been undeserved in recent years. If implemented responsibly, judiciously and with the protection of the consumer and the U.S. taxpayer in mind, I believe lenders can both properly serve credit-worthy consumers, and in so doing, restore the strength of the housing market that is critical to overall economic growth.

PRMI is gearing up to provide more options for consumers, including private mortgages that fall outside the QM definition. Although 98 percent of the loans prepared by PRMI fall into the QM category, the Non-QM loans offer exciting possibilities. In time, I believe the Non-QM loans will be as relevant and common as the FHA, VA, Freddie Mac and Fannie Mae. Regardless, I feel that these changes will inspire exciting debates among mortgage professionals and consumer advocacy groups over the next few years.

I remain positive and optimistic regarding the future of the mortgage and real estate industry, and the opportunities that these new rules bring. It is time that we put the consumer first. In achieving that, we need to deploy new ways to safely provide financing options that fit the broader market and the many unique needs of the individual home buyer.

The S.A.F.E. Act Puts Non-Depository Institutions at a Disadvantage

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008, otherwise known as the S.A.F.E. Act, requires states to set a minimum standard for the licensing and registration of Mortgage Loan Originators (MLOs). Basically, it set the baseline standard for education and testing requirements for anyone wanting to originate mortgage loans with a state-licensed, non-depository institution (i.e. a non-bank mortgage lender). It also led to the creation of the NMLS (Nationwide Mortgage Licensing System) Registry.

This legislation created some things we can really appreciate. Our industry now has some requirements and filters to help ensure that only those who really understand the origination process are creating home loans for consumers. I fully support this. I do, however, oppose this one very important fact about the S.A.F.E. Act—this regulation only applies to state-licensed, non-depository institutions (non-banks). Individuals who are originating loans for a federally chartered or insured depository institution (a bank) are not required to meet any of the same basic requirements. Actually, I take that back—they are required to perform a criminal background check and pay a registration fee that’s a fraction of the fees we are required to pay for our licenses.

To help you understand, let’s check this comparison table outlining the minimum federal requirements for obtaining your mortgage origination license.

Minimum Requirements Applies to Non-Banks Applies to Banks
20 Hours of Pre-Licensing Education X
8 Hours of Continuing Education Each Year X
State-Specific Test X
National Test X
Criminal Background Check X X
Credit Report Submitted to State Agencies X
Mortgage Originators License X

States are allowed to set higher standards than the minimum requirements set forth in the S.A.F.E. Act—and many states have.  These increased standards also increase the time and cost to become an MLO. Additionally, since every state has unique laws and practices, a state licensed Originator must be licensed in each individual state in order to originate mortgages in that state, yet a bank Originator does not. While this is an important rule that aims at protecting the consumer, the rule does not protect all consumers as it does not apply to all MLOs.  I believe that all consumers should be protected and should conduct business with a fully-licensed, qualified Mortgage Loan Originator.

These minimum requirements not only take time, they also take money. Having the money to complete the required education, testing, and licensing creates a deeper barrier to entry for would-be state licensed Originators versus bank Originators. Let’s also take a look at the monetary investment to obtain your mortgage origination license.

Required Fees Non-Banks Banks
Pre-Licensing Education $399 $0
State-Specific Test $69 $0
National Test $92 $0
Criminal Background Check $39 $39
Credit Report $15 $0
Mortgage Originators License $80-$680 ($200 avg) $30 (Registration Fee)
TOTAL $829 $69

The disparity not only exists in the licensing requirements and the cost between non-banks and banks, but also in the level of expertise and talent. If an individual is unable to pass the test, or cannot afford the education and licensing, he is unable to become an Originator for a non-bank. However, he may apply and, if he is hired, start originating for a bank on day one—without any education, testing, or licensing requirements. What’s more, he or she can originate in all 50 states.

Because of the higher barriers to entry state-licensed, non-depository institutions face, we have been put at a disadvantage in hiring and retaining Mortgage Loan Originators who are actively registered with a federally chartered or insured depository institution. State-licensed MLOs can start originating at their new job with a bank within a few days, but an MLO working for a bank cannot make the transition to a non-bank within the same period of time. He must complete the entire required licensing first. This has caused non-banks to have MLOs on payroll while they finish their license and has caused other MLOs to delay being hired for an extended period of time.

So, what’s the solution? The complete solution is to require federally chartered or insured depository institutions to meet the same minimum requirements as state-licensed, non-depository institutions. However, in order to at least address the disparity that exists in switching between the two, the NMLS has announced that a future update to the system will prevent a bank from seeing an individual’s education and testing information.  This is important because in the past some bank employers would terminate an individual’s employment when they realized the individual was working on becoming licensed, and this type of activity resulted in some individuals being out of work unexpectedly.  The release is expected to occur by July of this year.

Also, The Mortgage Bankers Association (MBA) has proposed that states grant a 120-day transitional license to MLOs wanting to move to a non-bank.  This allows them to continue originating (this time for their new company) while they complete the requirements for their license.  Obviously there are some legal and administrative issues that must be worked out with each state. However, the transitional license that has been proposed by the MBA would help to create a more equal playing field between non-banks and banks, something I fully support—and it will keep originators employed and able to support their families during the licensing process.