"Safe Harbor" for QM Loans May Not Protect Banks

American Banker, September 6, 2013 | Go to article overview

"Safe Harbor" for QM Loans May Not Protect Banks


Byline: Rachel Witkowski

WASHINGTON -- A legal safe harbor designed to protect lenders that make "qualified mortgage" loans from consumer lawsuits is likely to expose institutions to potentially even greater liability, according to several banking experts.

In theory, under the Consumer Financial Protection Bureau's final mortgage rules, low-priced loans that meet all the criteria of QM are supposed to be largely immune from consumer lawsuits. But lawyers are warning that in practice, consumers might successfully challenge a bank if it fails to fit any one of the multitude criteria laid out by the CFPB in defining the term.

"The challenge is that lenders can't just waltz into court and say, 'this was a QM loan.' They have to prove it," said Julie Williams, a managing director and head of the domestic advisory practice at Promontory Financial Group, and the former chief lawyer for the Office of the Comptroller of the Currency. "As people have looked at the requirements for QM more closely, I think the takeaway is that the requirements are quite extensive and quite complex."

The CFPB provided two legal protection options for lenders within its qualified mortgage rule so long as they verify a borrower's ability to repay and meet a debt-to-income ratio of no more than 43%. Lenders can either receive a rebuttable presumption for higher-priced loans typically given to borrowers with weaker credit; or they can receive a higher legal safe harbor protection on lower priced loans.

The problem, observers said, is that there are complicated metrics built into the criteria for safe harbor that could easily trip up a bank if it was challenged in court. For example, the rule has a certain criteria in how a bank calculates the point-and-fees structure of a loan that could open the door to greater liability. "We expect defaulted borrowers to challenge even so-called 'safe harbor QM loans,' typically by challenging any of the characteristics that involve calculations or judgments, including the 3% 'points and fees' limit or the calculation of the borrower's debt-to-income ratio," said Jeffrey Naimon, a partner at BuckleySandler. "The issue is that the lender not only has to get it right but has to maintain documentation that will be sufficient to prove the safe harbor QM designation to a court for many years to come. Although we expect lenders to win the vast majority of these cases, the cost of victory may be high."

The fear remains that by having more criteria in the QM rule, it opens the door for borrowers or investors to pick and choose a myriad of ways to challenge a lender. One small slip could completely remove the safe harbor protection for a lender on an entire portfolio of loans, some said. …

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