To conclude our discussion on the three safe harbor tests offered to loan originators under the QM rule as it relates to the Ability to Repay rule, we come at last to the third test. This involves borrower paid discount points in connection with the loan.
Under the “points and fees” calculation, borrower paid discount points can exclude up to 2 discount points if the interest rate before the discount does not exceed the APOR for a comparable transaction by more than 1 percentage point; or exclude up to one discount point if the interest rate before the discount does not exceed the APOR for a comparable transaction by more than 2 percentage points.
If any of the “points and fees” are “baked” into the interest rate, they will not be counted in the 3% rule, but may affect the interest rate and APR enough that it may not pass either the APR to APOR test or the interest rate to APOR test. Lenders must be very careful to get the right mix for their pricing strategies to maximize the origination of QM loans.
The new proposed QRM (Qualified Residential Mortgage) rule looks to be aligning its rules to the QM, which makes it even more imperative to originate these loans. If you are securitizing your loans in the secondary market and you do not qualify as a QRM, you will be required to retain 5% ownership of that security. This practice could severely limit your available funds and liquidity.
Talk to your compliance advisors today about setting up processes within your institution that will allow you to easily test the loans in your pipeline for QM readiness. If you want to grow your loan origination business in this environment, understanding how to originate the kinds of loans the regulator wants to see is the best path forward.
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