• NCUA Issues Supervisory Letter on Risks for QMs and Non-QMs
  • January 10, 2014 | Authors: Michael M. Bell; Steven M. Van Beek
  • Law Firm: Howard & Howard Attorneys PLLC - Royal Oak Office
  • As the January 10, 2014 compliance date approaches, the National Credit Union Administration ("NCUA") issued Letter to Credit Unions 14-CU-01, which indicates credit union examiners will "take into account a credit union's good-faith efforts to comply with the [ability-to-repay/qualified mortgage rule]."

    The Letter also emphasizes that credit unions may originate qualified mortgages ("QMs") and non-qualified mortgages ("non-QMs"); but, examiners will be carefully evaluating each credit union's risk analysis.

    Additionally, NCUA shared Supervisory Letter 14-01 which was sent to all credit union examiners. All credit unions originating mortgage loans should review the Supervisory Letter - especially the Risks and Exam Procedures sections.

    The Supervisory Letter walks through the following risks for QMs and non-QMs:

    • Credit Risk;
    • Liquidity Risk;
    • Concentration Risk; and
    • Legal Risk.

    The Exam Procedures emphasize specific steps credit unions should take to verify and document their business decisions, including:

    • Establishing concentration limits for the overall real estate portfolio as well as concentration limits for any non-QM mortgages;

    • Pricing any non-QM mortgages adequately to address the additional risk;

    • Retaining knowledgeable and experienced personnel who understand the risks related to non-QM lending;

    • Determining how providing non-QMs will fit into the credit union's strategic plan and benefit its members;

    • Identifying and tracking non-QMs in the loan portfolio to provide for adequate monitoring regarding loan performance, loss ratio, and ALLL funding pools; and

    • Addressing legal risks, including having qualified legal counsel review non-QM mortgage loan programs.

    Throughout the Letter to Credit Unions and the Supervisory Letter, NCUA reiterates that credit unions may originate non-QM loans. However, it is clear NCUA expects credit unions to review - and document - the various risks involved in originating non-QM loans.

    Additionally, while NCUA has reiterated its "good-faith efforts" review standard for compliance, the heightened legal risks associated with the new ability-to-repay and qualified mortgage regulations will be present for all loan applications received on or after January 10, 2014.