- 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.