TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/409279
Th e M Rep o RT | 23 Feature W hat do Harry Potter's Ministry of Magic and the Consumer Financial Protection Bureau (CFPB) have in common? Neither seems to be anticipating developments that are pretty obvious to the rest of us. In the case of the Ministry of Magic, it didn't anticipate that he-who-must-not-be-named would return, while Dumbledore and Harry Potter certainly did. Similarly, nearly one year ago, CFPB director Richard Cordray said he did not anticipate a rise in litigation stemming from his agency's qualified mortgage (QM) rule1 that took effect in January of this year. So perhaps, just like Dumbledore and Harry Potter's plight, the safe harbor of QM may end up being a seven-novel saga. QM's safe harbor against litigation is valid provided a loan meets the minimum thresholds for debt-to-income and the Truth in Lending Act's (TILA's) "ability to repay" (ATR) requirements. CFPB's QM provides two classi- fications: rebuttable presumption (for higher-priced loans) and safe harbor (for all otherwise qualify- ing loans). In both cases, there is a direct avenue for challenge if the points and fees thresholds were not met. However, the safe harbor is designed to pre-empt any question to the underwriting standards and ATR qualifica- tions of a loan meeting the QM designation. Nevertheless, in real- ity, neither protects the creditor from borrowers—or more likely their attorneys—challenging the ATR calculation. Most likely this challenge will occur when the loan goes into delinquency. In fact, a fair and potentially "killer" question from a borrow- er, in either class of QM loan, would be to ask the mortgagee: "Prove conclusively that you complied with ATR and QM cri- teria and underwriting standards on my loans." This question is a great risk to every lender. To further compound the issue, this is truly a litigation threat that is difficult to quantify since the courts have yet to see and opine the effectiveness of QM's rebuttal and safe harbor. Today, the QM protection for most lenders is like that elusive door that Harry Potter can never quite get to in his dreams. It's out there, but no one is quite sure of its meaning. "QM can provide the origina- tor a safe harbor, but they're never really safe. There are foreclosure defense attorneys in the country just waiting for the opportunity to spring their trap on the lending industry. That trap is: 'Prove to me my borrower could afford this loan,"' said Paul Schieber, a partner with the law firm Stevens and Lee. Under the rebuttal presump- tion, higher-priced, covered QM transactions are only presumed to be ATR compliant. A con- sumer with this brand of QM mortgage loan has the clearest path to question the lender's ATR and, therefore, QM protec- tions, because the rule openly permits it2. However, even if the loan is not higher priced, there are no limitations prohibiting borrowers (or their counsel) from questioning if their loan meets the QM standards, typically via litigation. A borrower's argument will be that the lender engaged in unfair or deceptive practices, which will likely win favor in the courts. What happens if you can't prove the borrower's ability to repay? Likely we will see a reversal of that loan's QM status and, with it, a lender's safe har- bor. This litigation could lead to a significant claim. Can you feel that scar aching now, Harry? Schieber further added, "We can expect that as soon as the first QM loan goes into default, the immediate course of action will be to claim the loan did not meet the QM standards. I also expect to see litigation even past the three-year timely payment standard; likely when that occurs we'll learn how defensible that tranche of the safe harbor really is." Venturing further into the defense against dark arts, lenders can expect this to happen on ev- ery defaulted loan in non-judicial states. "Creating a litigation event in a non-judicial foreclosure ef- fectively extends the foreclosure proceedings out tremendously, creating the same timelines as that of a foreclosure in a judicial state. Even if successful in defending the case, that litiga- tion will extend any foreclosure timeline by months or years," stated Schieber. Best Practices that Don't Require Wizardry S o what can lenders do to protect themselves? First, the most important thing a lender can do is to have a fully documented file and retain it for a minimum of three years3. The file must be organized so that an independent observer can clearly ascertain that ATR standards were met. The problem is that a well- documented file doesn't recreate how the denominator in the QM equation was determined. Any The Enchanted Qualified Mortgage Rule and the Not-So-Safe Safe Harbor When it comes to QM and its so-called safety net, lender-related issues are rife with cloaks and daggers. By Jonathan Kunkle, President of GuardianDocs