NATIONAL HARBOR, Md. — Even though credit unions have nearly 300 days before they are required to comply with new CFPB qualified mortgage rules, attorney Andy Keeney told NAFCU Regulatory Compliance School attendees Thursday to start working on new underwriting standards now.
The event runs through Friday at the Gaylord Hotel and Convention Center in National Harbor, Md.
Because credit unions already meet most, if not all, qualified mortgage standards, Keeney said documentation proving compliance will be the industry’s biggest challenge. He suggested beginning the process now by creating a checklist that includes, at a minimum, the eight ability-to-pay requirements, and use it as a loan file coversheet.
“Some of you will say (these requirements are) just regular stuff that you already do,” Keeney said. “So the key is documentation. If you use the checklist as a coversheet for your loan file, you can sit back and relax, knowing your credit union has safe harbor.”
Of the eight requirements, the CFPB strongly suggests some items that serve as proper documentation, such as requiring two full years of pay stubs that prove employment status.
“You’ll be expected to explain any gap of one or more months of employment,” Keeney said, even if the member just takes a long vacation. Borrowers who graduated from college in the past two years must provide school transcripts for their loan files, for example.
Or, the veteran credit union attorney said, if a borrower was in the military but has since left, the lender will be expected to collect discharge papers and keep them in the loan file.
Qualified mortgages can’t exceed a 43% debt-to-income ratio, which Keeney said may confuse credit unions used to meeting Fannie Mae and Freddie Mac 45% debt ratio standards. However, he said, like at Freddie and Fannie, the rules seem to indicate the CFPB will use gross income in the debt ratio calculation.
Debt obligations like alimony or child support will also require documentation such as divorce court decrees or 12 months’ worth of canceled checks that prove the payment or receipt of child support.
“Now, this is starting to become a business decision for the credit union,” Keeney said. “You may start to ask yourself, how much documentation do you want to handle?”
Because credit unions don’t often get sued over mortgage lending violations, they may want to consider whether the risk of litigation may be easier to manage than gathering documentation to provide safe harbor.
Keeney said he spoke to a credit union Wednesday that was asking about a balloon payment mortgage product and whether it fit qualified mortgage standards. The attorney said it did not, and the credit union’s immediate reaction was to discontinue the product.
He said the CFPB is sending mixed messages by setting specific qualified mortgage rules, while Director Richard Cordray is telling lenders the rules don’t intend to discourage mortgages that don’t fit the qualified standards.
“So which is it? Will we follow safe harbor or do biz as normal?” Keeney said. “You’ll have to balance the risks. It really is a limbo game.”