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Chrisman's Corner: The Qualified Mortgage Rules Are Not Flawless

We’re into the Qualified Mortgage era by about six months. The rolling out of QM by the CFPB, in and of itself, did not cause any lenders to exit the business – certainly not JMAC who adheres to rules quit readily. In fact, it was relatively well documented that the bulk of loans originated during 2013 would have fit inside the QM box. But as the months have gone by, compliance-minded lenders like JMAC have become intimately aware of the intricacies of the QM requirements, and begun to discover problems.

For example, the question of, “What is required to prove rental income in order for a loan to be a Qualified Mortgage?” JMAC underwriters know that any borrower who relies, all or in part, on rental income to obtain a new loan must be able to prove that the rental income is stable, has some history, and is expected to continue. And JMAC’s brokers know that borrowers typically show rental income on Schedule E of their Federal tax returns, and lenders, in turn, typically use that documented rental income.

Since the CFPB is in charge of underwriting criteria now for QM loans, of course, Appendix Qis under its jurisdiction. Look for the sections II. Non-Employment Related Consumer Income,

D. RENTAL INCOME, 4. Documentation Required to Verify Rental Income: “Analysis of the following required documentation is necessary to verify all consumer rental income: a. IRS Form 1040 Schedule E; and b. Current leases/rental agreements.”

Given that statement, if a borrower has rental income and a lender like JMAC wants to make a loan to the borrower that fits into the QM mold, they’d better have both the Schedule E and the lease agreements. So by the strict letter of the law, if a lender allowed one or the other, the loan is not a QM loan.

We point this out to our brokers, not to say it is wrong or right, but to suggest that as time passes we will continue to see underwriting criteria that are questionable, need to be changed, or are overlooked by many. And once again we must ask, “Is this helping JMAC’s borrowers?”