IBA Compliance Connection

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We make fewer than fifty closed-end, first-lien residential mortgage loans per year, which we keep in our portfolio, and we have under $2 billion in assets. Can we make “small creditor” qualified mortgages (QMs)? Also, are QMs required to have a loan-to-value (LTV) ratio under 80%? Our previous compliance officer said this was a requirement.

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Since your bank has less than $2 billion in assets, and it originates and sells less than 2,000 residential mortgages in each previous calendar year, the bank meets the definition of a “small creditor” under Regulation Z.

Generally, QMs are subject to a number of requirements, including a maximum 43% debt-to-income (DTI) ratio. However, as a small creditor, your bank qualifies for a special provision in Regulation Z which permits small creditors to originate QMs without applying the 43% DTI ratio test.

Also, we are not aware of any laws or rules limiting QMs to a maximum LTV ratio of 80%. Your previous compliance officer may have been thinking of the “qualified residential mortgage” (QRM) rulemaking, which originally proposed a controversial maximum LTV of 80% for purchase money transactions. The federal agencies removed this LTV requirement from the final rule and harmonized the QRM requirements with the QM standards.

As a reminder, we do note that small creditor QM loans are subject to a raft of other requirements, including that they must be held in portfolio (with some exceptions), they may not exceed certain points and fees limits, and they may not include balloon features unless your bank operates in a rural or underserved area, as defined by Regulation Z.

For resources related to our guidance, please see:

  • Regulation Z, 12 CFR 1026.43(e)(5)(i)(D) (The small creditor portfolio QM provisions define a “small creditor” as satisfying “the requirements stated in § 1026.35(b)(2)(iii)(B) and (C)” — having less than $2 billion in assets and originating no more than 2,000 first-lien covered transactions that subsequently were sold over the last calendar year.)
  • Regulation Z, 12 CFR 1026.43(e)(2) (Outlines the general QM requirements, including the requirement that the “ratio of the consumer’s total monthly debt to total monthly income at the time of consummation does not exceed 43 percent. . . .”)
  • Regulation Z, 12 CFR 1026.43(e)(5) (Outlines the requirements for small creditor portfolio QMs, with an exclusion for the 43% DTI requirement.)
  • QRM Final Rule, 79 Fed. Reg. 77601, 77688 (December 24, 2014) (“Accordingly, the final rule defines a QRM to mean a QM, as defined under section 129C of TILA and the regulations issued thereunder, as may be amended from time to time.”)