Immigrants could face an untended consequence of the new qualified-mortgage rule.
Industry insiders have been saying for months that borrowers who don't fit a traditional credit profile could find it challenging to secure a mortgage. That group seems to include immigrants who lack a credit or work history in the U.S. to support their application. They may also be self-employed, which can also make it harder to get a mortgage under QM.
Still, if a void exists it's likely that a group of lenders will step in and fill it, some industry experts say. And it is still too early to tell the true effects of QM, they add.
"Like any other broad sweeping government regulation there will always be unintended consequences," says L.T. "Tom" Hall, chief executive of Resurgent Performance. "Banks can't afford to wait for regulators to modify the rules to accommodate this segment of the population. Immigrants are an important part of our country."
About 80% of bankers said they expect QM to reduce mortgage credit, based on a recent survey from the American Bankers Association. Roughly a third said they would restrict lending only to QM loans, and 29% said their non-QM lending would be limited to specific markets.
Royal Business Bank, a Chinese-American bank in Los Angeles, has been looking to expand in mortgages, but it has encountered issues qualifying immigrants for mortgages because the borrower often lacks credit or employment history in the United States, says Alan Thian, the $718 million-asset bank's CEO.
"They may be very established in China," Thian says. "They may have received their green card and are buying their first home and can put down up to 60%. But they may not even have an employment record in the United States."
Whether credit history is considered when making a mortgage depends on what part of the rule the lender is applying, says Richard Andreano Jr., a partner at Ballard Spahr. A general QM loan focuses on a borrower's debt-to-income ratio as the main underwriting requirement and credit history isn't necessarily part of that.
Still, QM is "not a substitute for the lender's underwriting standards," meaning lenders are being particularly cautious about making loans and may consider credit history anyway, he says.
If a lender is doing a temporary QM loan using standards from Fannie Mae and Freddie Mac, or completing the loan under the general ability-to-repay rule, then credit history is considered, Andreano says. Regardless of the requirements, lenders are being more conservative with underwriting.
"In the past, the lender might take a risk," Andreano says. "But because of the rules, that's less likely now. It is a big wait-and-see [approach to] how the regulators and courts react to these rules when situations of alleged violations appear."
The ability-to-repay rule does not mean that only QM loans are allowed. Instead, lenders must make a reasonable, good faith determination that the consumer can afford the mortgage, the Consumer Financial Protection Bureau wrote in an emailed statement. The QM definition covers the vast majority of mortgages but there are plenty of good loans made that fall outside of that as well.
Additionally, the ability to repay rule does not require creditors to use credit histories from a credit bureau. Rather, they have flexibility in how to verify the underwriting when evaluating ability to repay and can verify credit history using nontraditional references, such as rental payment history, the CFPB said.
Beyond credit history, immigrants may run into issues if they are self-employed or own small businesses, experts say. Such borrowers typically have the hardest time proving their income and may have high debt-to-income ratios since they often list the lowest possible income on tax returns.
The Resurrection Project in Chicago works with immigrants, including "tons of entrepreneurs who are self-employed," on preparing them to buy a home, says Kristen Komara, the nonprofit's vice president of financial wellness. Self-employed borrowers can have trouble documenting their income in the traditional sense, she says.
"It has always been more challenging for the self-employed, but QM will make it that much more challenging," Komara says. "That's not just for Latino immigrants but for people all across the country."
It is likely that some lenders may be reluctant to make loans that don't strictly fall within the QM guidelines, experts say. Banks are worried that they will face litigation if the loan goes bad. Since QM, which went into effect in mid-January, is still so new, there is no legal precedence for banks to look to for guidance, says Rod Alba, vice president of mortgage finance and senior regulatory counsel at the American Bankers Association.
Banks are also unsure how the rules will be interpreted during regulatory examinations, making them more cautious, says Elizabeth Eurgubian, vice president and regulatory counsel for the Independent Community Bankers of America.
"The reality is that community banks are the ones that lend to atypical populations," Eurgubian says. "Their customers are everyday people with everyday jobs. We hope the QM rule doesn't hamper their ability to do that."
Banks are also concerned about inadvertently violating fair lending laws if it appears they are rejecting too many applications from certain groups, such as immigrants, Alba says. Regulators have tried to reassure banks that a decision to follow QM guidelines won't affect their fair lending standing.
"From our experience, some classes and communities will be affected," Alba says. "We are extremely concerned."
It is possible some lenders will see an opportunity to make non-QM loans to certain borrowers, Hall says. Those loans would likely have to be held by the lenders and, therefore, would follow certain underwriting standards.
The Resurrection Project hears from lenders that are willing to work with immigrants by offering mortgages they will keep on their books, Komara says. Some of the loans are made so the bank can earn Community Reinvestment Act credit and may have restrictions, such as a cap on a borrower's income.
Still, borrowers who don't work with a group like the Resurrection Project, which understands housing policy and how to work with lenders, may struggle, she adds.
"We know how to navigate QM and we know how to find the portfolio products," Komara says. "I think for individuals who don't find agencies to help them, they may have some challenges getting access to credit."
Paul Davis contributed to this story.