Why Haven’t Loan Officers Been Told These Facts?
Non-QM
“Non-QM” encompasses a variety of mortgage credit offerings, but primarily refers to mortgages other than “Agency” products.
An agency product is a loan guaranteed by a government agency or a government-sponsored enterprise. In general, Agency products or agency-like products (investment grade) may include any widely securitized mortgage pools, including prime jumbo products (e.g., private-label).
A non-Qualified Mortgage is a straightforward term for a TILA-covered mortgage that does not meet the criteria for a Qualified Mortgage (QM). Which begs the question, what defines a QM loan?
The distinctives of what is sometimes called the “General QM” category revolve around an APR test. This General QM distinction may vary with government-insured loans, as the agencies enjoy a degree of rule-making autonomy for their loan programs.
QM, Other Than Regulation Z
For example, the FHA regulations on its QM safe harbor. For more on the meaning of “safe-harbor,” and the General QM, please visit LOSJ V6 I6.
(HUD Regulation) 24 CFR § 203.19(b)(3)(ii) Qualified mortgage. A single family mortgage insured under title II of the National Housing Act (12 U.S.C. 1701 et seq.), except for mortgages under paragraph (c) [HECM notably, also manufactured housing] of this section, that has an annual percentage rate that does not exceed the average prime offer rate for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual mortgage insurance premium and 1.15 percentage points for a first-lien mortgage is a safe harbor qualified mortgage that meets the ability to repay requirements in 15 U.S.C. 1639c(a).
HUD adopts the points and fees limits under Regulation Z QM requirements at 12 CFR 1026.43(e)(3).
Assume an 30 year fixed rate APOR of 6.00
The FHA calculus looks like this:
Annual FHA MIP .55
FHA QM factor 1.15
1.15 + .55 = 1.70
1.70 + 6.00 = 7.70% Maximum APR
Compare the 7.70 safe harbor cap to the subject APR to see if it meets the safe harbor threshold.
170 BPS over APOR is a generous margin. Yet, for a very low-balance 10 or 15-year FHA loan (How many of these will you see?:), this APR is possible. What happens if the loan fails the safe harbor test? It does not mean FHA won’t insure a mortgage exceeding this safe harbor threshold; it just means the lender has no QM-safe harbor. What is the big deal with this safe harbor? Apart from the QM safe harbor, the lender may find itself subject to a legal proceeding in which the lender’s reasonable and good-faith ability to repay (ATR) decision can be rebutted (challenged). In 24 Code of Federal Regulations (CFR), this is called a “rebuttable presumption” qualified mortgage.
Unlike Regulation Z General QM, which sets a maximum APR (2.25% above the APOR), the FHA does not impose an APR limit. If a loan meets FHA requirements, it qualifies as a Qualified Mortgage (QM) loan. The question then arises: do we have a rebuttable or non-rebuttable presumption of ability to repay?
24 CFR § 203.19(b)(2)(ii) To rebut the presumption of compliance, it must be proven that the mortgage exceeded the points and fees limit in paragraph (b)(1) [same standard as 1026.43] of this section or that, despite the mortgage having been endorsed for insurance under the National Housing Act, the mortgagee did not make a reasonable and good-faith determination of the mortgagor’s repayment ability at the time of consummation, by failing to evaluate the mortgagor’s income, credit, and assets in accordance with HUD underwriting requirements.
Compare the FHA Safe Harbor to the Conventional Financing Regulation Z General QM Benchmark: 2.25 over APOR
6.00 + 2.25 = 8.25% Maximum QM APR
However, for lenders to enjoy the Regulation Z safe harbor provisions, the loan cannot be a Higher Priced Mortgage Loan (HPML). Like the FHA, Regulation Z provides a non-rebuttable and rebuttable presumption of ATR compliance. For conforming loans, if the subject APR exceeds 1.50 over APOR, no safe harbor presumption of ATR compliance (rebuttable presumption).
For example:
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APOR of 6.00 + 1.50 = 7.50% maximum APR for General QM with the safe harbor (nonrebuttable presumption).
Identifying and Protecting More Vulnerable Consumers
Riskier credit management typically shows specific characteristics, one of which is a higher Annual Percentage Rate (APR). For example, consider competing with a 30-year fixed conventional mortgage with an APR of 8.25% or even 7.50%. What type of consumer would be willing to pay such a high rate? It would likely be either someone who is poorly informed or a subprime borrower. A borrower ineligible for agency financing. What was one of the main reasons for the occurrence of the Great Recession? See the light?
You might ask how providing a safe harbor, or not providing one, protects consumers. Because without the safe harbor, there awaits a legion of lawyers that are fully capable of turning a single Consumer Financial Protection Act (CFPA) violation into a living nightmare for violators. That’s just the federal government lawyers, who are currently, shall we say, temporarily indisposed, to pursue such cases. However, every state has laws similar to the federal Consumer Financial Protection Act (CFPA). Many of these statutes permit “private actions” and class actions. There are lawyers flying about in G-5 jets actively seeking out these opportunities, waiting to bag their dream, a 42-point lender.
You might say, those big-buck-hunting lawyers sound scary. What if we just stop making loans unless the transaction provides a safe harbor? Either that or we could avoid loans subject to consumer protection law altogether.
Reemergence of Common-Sense Lending
Years ago, when I first started originating mortgage loans, I witnessed the emergence of the limited-documentation loan, which my employer, Great Western Savings, called “Easy Doc.” It was an exciting development.
Back in the early ’80s, my territory included Brentwood, Pacific Palisades, and parts of Malibu (lenders assigned geographic territory to originators back then). Many of my prospects were professionals and entrepreneurs with highly complex financial situations. Putting the documentation together could be painful for the customer and the originator.
The Easy Doc terms required a 25% down payment from an acceptable source, with documentation, and excellent credit. However, there was no income verification, which was always the fly in the ointment. The rationale was straightforward: most people who can afford a 25% down payment and have pristine credit likely know what they are doing. The performance of these loans was exemplary.
Non-QM
Todays non-QM is a sort of hybrid portfolio lending, similar to what I was originating over 40 years ago. The difference is in income verification. However, instead of shoehorning people into the GSE/FHA policy criteria, which is often wooden, politically driven, and archaic, non-QM allows alternative documentation and common-sense standards. Just to say, when it comes to on-time performance, I’d put most non-QM portfolios up against any FHA portfolio all day long. Non-QM loans, like QM loans, fall under the TILA 15 USC §1639c. minimum standards for residential mortgage loans.
Ability to Repay
15 USC §1639c(a)(1) In accordance with regulations prescribed by the Bureau, no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments.
The underwriting process for these loans is somewhat flexible. The law does not specify a strict methodology for making good-faith and reasoned decisions. Instead, it evaluates loan performance to assess whether the lender’s decision was reasonable. For example, if I consider the great eight credit qualities, consistently approve loans over a 50% DTI, and only approve loans on Tuesdays but have a five-year record of no late payments in my portfolio, who could argue with that? If there is a lack of good payment history, the lender may be subject to scrutiny regarding the ability to repay (ATR), regardless of what you are doing. It’s a little more involved than that, but not much.
What is the reason that Non-QM Loans permit proof of income that agency lenders consider unacceptable? Because Congress intended to allow some latitude in credit administration. Note the vague requirements from the Dodd-Frank TILA ATR amendments below:
15 USC §1639c(a)(4) A creditor making a residential mortgage loan shall verify amounts of income or assets that such creditor relies on to determine repayment ability, including expected income or assets, by reviewing the consumer’s Internal Revenue Service Form W–2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets.
Is it possible for these non-QM styled loans to meet QM requirements? Besides the APR spread, what prevents these non-QM loans from qualifying for the safe harbor? Additionally, how do Higher Priced Mortgage Loans under Regulation Z relate to non-QM loans? Are they the same?
Check back next week for answers to these questions and more!
Dennis Weaver Great Western Ad
BEHIND THE SCENES: THE CFPB, DEAD MAN WALKING ON THIN ICE
February 24, 2026
From:
Evan Weinberger
Correspondent
Bloomberg Law
Appellate judges in Washington grappled with whether a lower court overstepped by blocking Russell Vought, acting chief of the Consumer Financial Protection Bureau, from firing 90% of the agency’s staff and otherwise shutting it down.
At a nearly three-hour hearing Tuesday, judges on the full US Court of Appeals for the District of Columbia Circuit tested how far courts should go to limit the Trump administration’s moves rolling back the consumer finance watchdog created after the 2008 financial crisis.
Eric McArthur, a Justice Department attorney representing the CFPB, argued the preliminary injunction—since vacated by a three-judge DC Circuit panel—was based on erroneous facts. There was never a final decision to shut down the agency, and the CFPB employees who sued to stop Vought should’ve brought their claims through the Merit Systems Protection Board, he added. “Here the MSPB has exclusive jurisdiction over reinstatement of employees,” he said.
But McArthur faced stiff pushback, most notably from Judges Cornelia T.L. Pillard and Patricia A. Millett, both Obama appointees. Pillard sat on the panel that vacated the preliminary injunction and dissented from the opinion.
“What you want us to hold is that the CSRA has tentacles that reach across the entire litigation system” and block courts from preserving offices that Congress created, Millett said, referring to the Civil Service Reform Act that created the MSPB.
The National Treasury Employees Union and other plaintiffs sued to block Vought from gutting the CFPB last February, just after he took helm of the agency and kept in place a broad stop-work order originally set by Treasury Secretary Scott Bessent, who briefly served as acting director.
‘They Want Nothing’
The NTEU plaintiffs are making a bigger argument than preserving any particular jobs, Jennifer Bennett, a Gupta Wessler LLP principal representing the union and its co-plaintiffs, said at the arguments.
“This is a fundamental separation of powers claim about the structure and very existence of an agency,” she said.
Many of the judges appeared open to the idea of allowing some form of injunction to remain in place to keep the CFPB functioning while courts deal with substantive questions about the Trump administration’s plan for the agency. But they struggled with what that should look like.
“You want everything, and they want nothing,” Pillard told Bennett.
Firings Blocked
Judge Amy Berman Jackson of the US District Court for the District of Columbia last March issued a preliminary injunction aimed at blocking the mass firings and forcing the CFPB to perform functions mandated by the 2010 Dodd-Frank Act, such as maintaining its consumer complaint database.
A split DC Circuit panel lifted Jackson’s injunction in August 2025, opening the door for Vought to fire most CFPB staff members and take other actions to cut down the agency.
Judges Neomi Rao and Gregory Katsas held that Jackson lacked jurisdiction to issue the preliminary injunction and that the plaintiffs had failed to prove Vought’s plans to fire CFPB workers, cancel contracts, and wind down the agency constituted final actions subject to challenge under the Administrative Procedure Act.
Pillard in her dissent said the preliminary injunction was necessary to maintain the status quo while courts determined the legality of the Trump administration’s moves.
The union and its co-plaintiffs subsequently pushed for a full DC Circuit review of the panel decision, which was granted in December.
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