Attorneys Weigh in on QM and its Impact on Buybacks & Liabilities; Upcoming Events
I like to say that last week's MBA conference was a compliance & regulatory conference that happened to include some mortgage banking information. QM compliance is only couple months away and hopefully the information below will help clear up some concerns on liabilities!
"Rob, regarding buyback exposure under QM, if a lender closes a loan believing that it meets the QM safe harbor guidelines (43% DTI, 30-yr fixed rate, fully amortizing, and so on) and sells it to the agencies or an aggregator, but the loan is later found to have a DTI of 43.1, can the lender be forced to buy the loan back? And regarding the borrower exposure under QM/ATR, if the borrower is not making their payments, can the lender be subject of some type of litigation by the borrower, or someone else, for giving them a non-QM loan that would be any different from how things are now?"
J. Steven Lovejoy, with Shumaker Williams (firstname.lastname@example.org) writes, "This raises some interesting questions. Having been on the defense side of many repurchase demands, in my experience the validity of the buyback demand depends, in the first instance, on the terms of the purchase and sale, correspondent or broker agreement between the originating entity and the purchaser or remote lender. I think the issue of whether the repurchase demand is enforceable would be subject to the same issues encountered in any repurchase demand...such as, who did the underwriting; how discoverable was the flaw, are there limitations issues, etc. However, the question does point out something about the QM rule that may not be well known. That is, the issue of whether the loan qualifies for QM status in the first place can be questioned by the borrower and may be the subject of litigation. The 'safe harbor' does not cover this threshold issue. So, in a case brought by the borrower against the creditor alleging violation of the ability-to-repay rule, if the QM status is confirmed, case over. If not, it would go to the next phase, which is a factual battle over whether the borrower had the "ability to repay" at the inception of the loan transaction. Because of this potentiality, were I drafting the correspondent (or other) agreement on behalf of the loan purchaser, I would definitely have a repurchase/indemnity trigger in the event it is discovered that the loan did not qualify for QM status when it was originated. I assume the GSE's will do the same."
Thomas Black, with Black, Mann & Graham (email@example.com) opines, "If you have a loan that you intended to originate as a General QM or Agency QM, and you fail to comply with the requirements (in the example the DTI slightly exceeds 43%) then you did not originate a QM loan. You cannot un-ring a bell and you cannot cure a QM after consummation. If you sold the loan you likely provided reps and warranties that you did originate a QM loan. Under your agreement with your investor you may be subject to a buy back request. As regards to the borrower, you probably will have met the General Ability to Repay (ATR) requirements (the eight underwriting guidelines) The issue is not did you exceed 43% but rather was there sufficient residual income. That is a question of fact for the court to decide- but the answer here is probably yes. Remember that originating an ATR loan provides no safe harbor and no presumption. A borrower can affirmatively sue for three years from the date of closing asserting that they did not have the ability to repay that loan, or they may raise it as a defense to foreclosure over the life of the loan."
Brian Levy with Katten Temple (firstname.lastname@example.org) writes regarding the first question, "Probably yes, because it appears that most big investors are going to mirror their underwriting guidelines to QM. This means they have (or will soon) amended their selling guides to include QM's specific requirements such as the 43% DTI and 3% points and fees limits. Going over 43% DTI will then be like failing to meet any other underwriting guideline that might result in repurchase demand. Thus, under loan sale agreements, originators will probably be required to meet the QM standard or they will face contractual remedies from their investors. I said "probably" because it will always depend on the terms of the originator's loan sale agreement and those things are sometimes negotiable."
On the second question, "As opposed to contractually based secondary market exposure arising from QM, the lender's exposure to the consumer arises from compliance obligations such as the Truth in Lending Act. TILA's requirement to meet the "ability to repay" test (ATR) previously only applied to higher priced loans. In January, however, it will apply to most loans. The ATR test, however, just requires the lender to make a "good faith reasonable determination of the borrower's ability to repay the loan". It seems like an easy standard to meet, but the squishiness of the word reasonable makes a lot of people (read-mortgage lawyers) nervous. As a result, QM was designed to offer lenders a limited safe harbor to not have to prove you met that squishy reasonableness test. QM is designed to be shield, not a sword. You might still have to buy the loan back (see above), but failing to meet the QM safe harbor does not doom a lender to a TILA violation if you can still prove you made a 'good faith reasonable determination of ability repay' (the rule gives you 8 factors to look at to show your 'reasonableness'). If all the lender does in underwriting is confirm QM was met but you later have the 43.1% DTI problem noted above, however, I am not sure that leaves you anything to fall back on to prove 'reasonableness'. So, if a borrower successfully challenges the QM DTI calculation (or 3% points and fees test for that matter), unless you can document that you have also examined the 8 ATR factors, you may be at risk of failing the ATR test."
Attorney Ari Karen with Offit Kurman (email@example.com) finishes off the discussion. "The main answer to this question is found in the text of the commentary as follows: 'the Dodd-Frank Act amended TILA to generally prohibit a creditor from making a residential mortgage loan without a reasonable and good faith determination that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan.' Thus, the inquiry is not based upon later events, but the facts that existed (based on the lenders' reasonable and good faith knowledge) as of the date of consummation.
"In answering your question, the issue is why did the DTI end up at 43.1%? If it was because the lender made a careless mistake and miscalculated or used the wrong figures - then yes - the loan is not going to be considered a QM loan. If on the other hand, it ends up being 43.1 based upon information the lender could not have reasonably known about at the time the loan was consummated, then the loan would still be considered a qualified mortgage. So long as the loan remains protected under the QM umbrella, the lender is protected from litigation (and possibly repurchase depending on the investor agreement)."
First, thank you very much to the four attorneys in helping educate folks. After reading the opinions, and after talking to a few investors at the MBA conference last week, it seems the real risk isn't that a loan here or there may not meet QM and result in repurchase, but that there is now a whole new definition of QM at which a borrower can take pot shots for their own financial enrichment. The potential loss severity written into the rule (finance charges, borrower damages, etc.), and the "evergreen" component of QM risk in the case of foreclosure is large enough that any and every foreclosure attorney can be expected to include a QM challenge factual battle as part of their defense. Heck, if foreclosure occurs during the first part of the loan term, then most of the payments are not principal, but finance charges. And if the loan shouldn't have been made in the first place because the borrower doesn't have the Ability to Repay, then the borrower could claim that their down payment is part of their damages. And what about that nice pool and back yard kitchen they put in - all gone with the foreclosure, and also could be part of the borrower damages, and also contribute to loss severity. No wonder servicers who have had significant experience with servicing through the financial crisis are concerned! Not only is there significant loss severity here, but also the raw legal cost of defending an unknown number of potential ATR and non-QM challenges.
Let's take a look at some upcoming events, even today's!
The CMLA and AMLG are offering a complimentary 90-minute comprehensive HOEPA webinar today at 2PM EST, 11AM PST. Register here (once the host approves your request, you will receive a confirmation email with instructions for joining the meeting. For assistance, please contact the administrator at firstname.lastname@example.org.) The webinar will include a discussion of the CFPB's expansion of HOEPA, a detailed examination of HOEPA's amended triggers and loan term restrictions, and a discussion of homeownership counseling requirements.
I might see some of you at the Texas Mortgage Bankers Association's warehouse conclave on November 12th from 2 to 5 during the TMBA Annual Educational Seminar & Marketplace held November 12th & 13th at the Westin Galleria Dallas. The format this year will be a panel discussion on topics relevant to today's market from a warehouse point of view. The panelists include Jack Nunnery (Texas Capital Bank), Corky Watts (C. Watts Mortgage Consultative Services), Doug Thorpe (SolomonEdwards), Phil Razori (MCT), Keith May (Richey, May & Co.), Ron Hughes (PitchPoint Solutions), Dean DeMeritte (Phoenix Capital), and yours truly to add style and grace (ha!). Registration is available at the TMBA website: www.texasmba.org.
The CFALA (Chartered Financial Analysts) is running another 2-day MBS boot camp this month. (The one run in the spring sold out.) It will be held on November 14th and 15th from 8:30 until 4:00 at CFALA's offices at 520 S. Grand Ave in Los Angeles. "We'll cover loan pricing, cash flow modeling, prepayment analysis, risk estimation and management, and deal structuring, among other topics." A link to the event, as well as registration information, can be obtained here.
"With all the upcoming legislation most mortgage lenders are left in the dark as to what they need to do next and what is really going on in the industry. CoesterVMS's CEO Brian Coester and I will be hosting a webinar, ("Conversation with Chrisman" - geez) which will be a Q&A based webinar designed to help folks obtain answers to the most pressing questions. Here's the link to the webinar registration - I'm sure you'll come up with some stumpers.
Fortunately with all this going on, the markets aren't doing much - so I won't waste your time. Rates improved a little Monday, with agency MBS prices better by maybe .125. Not much of note happened overnight, and for scheduled news we only have 7AM PST's Non-manufacturing ISM number, expected higher. The 10-yr closed Monday at a yield of 2.60%, and this morning is at 2.61% - not much change in MBS prices.