The qualified mortgage (“QM”) rule aims to reduce risk in the marketplace by “wrapping” loan transactions with a “seal of approval” in order to ward off legal claims. In particular, when the lender follows certain ability-to-repay (“ATR”) requirements, the loan becomes subject to a “safe harbor” or “rebuttable presumption” defense to borrower or investor claims. This article explores how those defenses might be interpreted by a court of law.
A QM mortgage is subject to either a “safe harbor” or “rebuttable presumption” defense depending upon whether this loan is “higher priced” or “non-higher priced.” Higher-priced loans are those with an annual percentage rate (“APR”) that exceeds the average prime offer rate by a defined margin, which is based on lien priority. Conversely, non-higher-priced loans have an APR below this threshold. Both loan types must still satisfy the other QM rule requirements, such as no negative amortization, balloon payments, or terms longer than thirty years.
The ATR requirements generally require lenders to determine the borrower’s ability to repay by considering factors such as borrow income, assets, and employment status. The “rebuttable presumption” of ATR rule compliance attaches to higher priced QM loans. According to the CFPB, the borrower must show that, based on information available to the lender at the time of consummation, the borrower had insufficient residual income to meet his or her living expenses after paying the mortgage and other debt and family obligations. In contrast, non-higher priced loans receive the stronger, “safe harbor” protection. According to the CFPB’s October 17, 2013 compliance guide, “a court will conclusively presume that [the lender] complied with the ATR rule” if the loan is a non-higher-priced QM loan.
In a traditional lawsuit, each party offers evidence to prove his/her claim, all the while attempting to disprove or rebut the adverse party’s claim. A court typically requires a “sound factual connection” between the facts which are presumed (i.e. do not have to be proven) and facts, which must be offered into evidence and subject to cross examination. Yet the QM rule is predicated on quantifiable elements of the subject loan, (such as APR, loan term, points, fees, etc.), whereas the ATR rule is predicated on a completely different set of facts unique to the borrower. Hence, the first problem is a court may not find a “sound factual connection” between the two groupings of evidence.
The second problem is that both are “affirmative defenses,” which must be proven only after the costly and time consuming process of each party “discovering” the other’s party’s facts and contentions.
While the CFPB’s effort to cloak lenders with the “safe harbor” and “rebuttable presumption” defenses is laudable, both remain subject to a court’s deliberation. Lenders should be cautioned that the defenses are not absolute and still subject to arguments made by astute lawyers.
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