*What’s A QRM? And Why Should I Care?*
**By Tyler Sherman**
***As part of the huge Dodd-Frank overhaul, Congress attempted to regulate the mortgage space by introducing the concept of, among other things, a Qualified Residential Mortgage (QRM). What does that mean exactly? Congress says, “The statutory framework for the QRM requires the regulators to evaluate underwriting and product features that historical data indicate result in lower risk of default, including: documentation requirements; monthly payment-to-income standards; payment shock protections; restrictions or prohibitions on negative amortization, interest-only and other risky features; and mortgage insurance coverage or other credit enhancements obtained at origination to the extent they reduce default risk.” If these standards are not met the lender must maintain a greater financial stake, commonly referred to as “skin in the game”, over that loan in case of default.
****For larger institutions, having more skin in the game is not a problem, but for small and mid-tier lenders, it’s a big problem. Many expect that the final definition of what exactly constitutes a QRM will shape or re-shape the mortgage industry going forward. Surely the politicians will figure out the real definition, but in the interim lenders have to be ready to figure out how to ensure compliance with QRM and survival after QRM comes into being. Fortunately there are technologies that can help.
****For example, lenders need to have metrics that tell them which of its loans are slam-dunk QRMs and which may need more work. A clear plan that is supported and enforced using business intelligence (BI) is just what the doctor ordered in this case. Here’s what I mean: If I’m a small mortgage bank I know I can hold 5% of the risk on so many loans each month. From there, I need to come up with a ratio of QRMs to non-QRMs that I can originate monthly. At that point, your BI technology should know what percentage of your loans do and don’t meet QRM guidelines.
****However, technology should and does go further. It’s not just about a monthly report that tells you, Mr. Lender, how well you did in meeting your ratio expectation and your compliance burden. It’s about offering full visibility into the pipeline in real time so you know what business is being done as its being done. From there, you can use BI technology to control that self-imposed ratio. This is important because you don’t want to take away human intellect, but rather you want to enhance the human’s ability to make good decisions. If you’re heavy on non-QRMs in the first half of the month, you want your technology to tell you that so you can ensure that the loans you do in the second half of the month meet the QRM threshold.
****Any time a metric is important, BI comes in handy. Each organization has to expect that it will do some QRM loans and some non-QRM loans. Technology will help the organization meet that ratio.
****Beyond just meeting ratios, BI should also ensure QRM compliance. Your technology should “know” what constitutes a QRM and tell you based on those parameters that this loan is a QRM and this loan is not. How do you do that? Think about it this way: if you know the questions on the test, study for those questions. If we know what the regulations demand, put those key performance indicators into your technology through BI. That protects you from an audit. Using BI you can prove that you followed the rules because BI fully documents all actions. This way BI is helping you meet your QRM ratio, enabling you to remain profitable and ensuring compliance all at the same time.