Complying With Ability-to-Repay and QM Rule

NCUA examiners to take into account a CU’s good-faith effort to comply.

March 1, 2014

In January, shortly before most of the Consumer Financial Protection Bureau’s (CFPB) mortgage lending rules took effect, NCUA issued Letter No. 14-CU-01 to federally insured credit unions. The letter provides guidance on the ability-to-repay and qualified mortgage (QM) rule. It includes Supervisory Letter No. 14-01, which describes both specific examination procedures and expectations for credit union mortgage lenders.

Many credit unions are naturally concerned about their next exam and the amount of attention the examiner will give to the CFPB’s mortgage lending rules. (All but the Truth in Lending Act/Real Estate Settlement Procedures Act combined rule have taken effect.)

Now, credit unions might have less reason for concern because the NCUA Letter and the Supervisory Letter both state that—as with any new requirement—NCUA examiners will take into account a credit union’s good-faith effort to comply with the new rules.

This suggests NCUA realizes some credit unions might not be in full compliance after the effective dates—not for lack of a good-faith effort but because their data processors or statement providers have yet to make the necessary changes.

Under these new mortgage rules, NCUA will place a particular emphasis on the safety-and-soundness implications of mortgage lending.

NCUA indicated credit unions might originate both QMs and non- QMs. A loan won’t be subject to safety-and-soundness criticism solely because of the loan’s status as a QM or non-QM. But credit unions choosing to make non-QMs should consider the potential new market and legal risks.

Whether a credit union originates QMs or non-QMs, it can expect examiners to evaluate credit risk, liquidity risk, and concentration risk.

As stated in the Supervisory Letter, NCUA expects its examiners to review—regarding the ability-to-repay and qualified mortgage rule— whether the credit union:

♦ Complies with the ability-to-repay requirement by having reviewed and updated its policies, procedures, and internal controls. At a minimum, the underwriting standards must include the eight required factors under the ability-to- repay rule.

♦ Verifies the information it collects to determine a borrower’s ability to repay using reasonably reliable third-party records. The credit union must retain these records for at least three years.

♦ Evaluates periodically the program and Allowances for Loan and Lease Losses (ALLL) funding in response to empirical results (based on actual delinquency and loss history) and current economic conditions.

♦ Establishes concentration limits for its overall real estate portfolio, as well as concentration limits for any non-QMs.

♦ Adequately prices non-QMs to address additional risk.

♦ Retains knowledgeable and experienced personnel who understand the risks related to non-QM lending (if applicable).

♦ Determines that providing non- QMs will fit into its strategic plan and benefit its members.

♦ Identifies and tracks non-QMs so it can adequately monitor loan performance, loss ratio, and ALLL funding pools.

♦ Addresses legal risks by having its legal counsel review non-QMs.

♦ Accounts for the impact these loans will have on asset/liability management modeling and liquidity management.

NCUA still expects credit unions to underwrite mortgages prudently, addressing all areas of risk including loan terms, borrower qualification criteria, loan-to-value limits, documentation requirements, loan portfolio decisions, and risk management practices, regardless of whether the mortgage happens to be qualified or nonqualified.

MICHAEL McLAIN is CUNA’s assistant general counsel and senior compliance counsel.