The QM Safe Harbor Just Became Less 'Safe'

JUN 24, 2014 8:52am ET
Comments (17)

We already knew that the safe harbor for qualified mortgage loans did not protect lenders from common law and statutory claims that predated the ability to repay laws. In other words, those liabilities that existed prior to ATR laws continued to apply to QM loans. However, lenders believed that by originating QM loans they were protected from ATR claims. After last week, that may not be true.

In connection its latest consent decree against a lender, the Consumer Financial Protection Bureau accused the company of engaging in unfair and deceptive acts in connection with originating loans that the borrowers could not "afford." (Editor's note:detailed discussion of the company's origination practices can be found on page 20 of the complaint.) Specifically, the lender allegedly engaged in practices that resulted in loans being originated where the borrowers lacked either the "ability or desire to repay" the loan. Obviously, this sounds analogous to an ATR claim, but slightly dressed up, in that particular acts or practices would need to be identified that caused the origination of these "unaffordable" loans.

While this was a CFPB enforcement action, lenders should realize that under the Truth in Lending Act, a borrower does have the ability to bring claims for unfair and deceptive acts and practices. Moreover, most claims against lenders are usually of the kitchen-sink variety, meaning that multiple acts of wrongdoing are alleged, thus satisfying the ambiguous "definition" of unfair and deceptive acts. Hence, a borrower wishing to pursue an ATR claim need only link these alleged unfair and deceptive acts to the origination of a mortgage he or she could not afford to entirely circumvent the safe harbor from the ATR laws.

Many of these claims may ultimately be resolved in favor of lenders. But to the extent the safe harbor was intended to protect lenders from the costs of legal defense, the application of UDAP to unaffordable lending certainly creates the risk that the safe harbor is in reality a mirage. That is particularly true because whereas an ATR claim would normally involve a narrow scope of discovery, limiting defense costs, a UDAP claim will involve allegations of pattern and practice wrongdoing, creating substantially more discovery and legal fees.

By opening a back door through UDAP, the CFPB may have increased the legal costs for lenders. After developing new processes to originate QM loans, lenders now face claims that in order to circumvent the safe harbor must be alleged in broad pattern and practice terms.

Comments (17)
In an overly- and overtly-regulated environment, no one is "safe" from anything, ever. We appear to be going down the slippery slope of putting business out of business, which only leaves us with government. Whatever will we do then? :)
Posted by Terry K | Tuesday, June 24 2014 at 12:22PM ET
I suspect that's the eventual plan...cradle to grave, the government will take care of you.. the government will feed, clothe and house you and you will work for the government owned businesses in the job the government selects for you.
Posted by jtetreault | Tuesday, June 24 2014 at 12:31PM ET
Except the link to the "consent decree" referenced in the article has nothing to do with originations... it pertains to the SunTrust SERVICING of loans that was "unfair and deceptive" ie robosigning, etc.. So this article doesn't make a whole lot of sense in that context, since the "source" information has nothing to do with QM and ATR.
Posted by jtetreault | Tuesday, June 24 2014 at 12:36PM ET
In addition to the recent cease and desist powers the CBPB claims, we are seeing precisely the kinds of federal authority the founding fathers resisted when framing the Declaration of Independence. We must hope that Gov Jindal is correct in saying that we will witness an awakening as a result of these and other abuses against our Constitution.
Posted by Tony | Tuesday, June 24 2014 at 12:42PM ET
Given the thousand of horrible abuses documented by the B of A et al over the last 15 years creating all kinds of suffering for families,we are now attempting to provide some kind of consumer protection to homeowners and those who want to be homeowners. The lack of regulation on Wall Street, the B of A created this economic crisis not seen since Herbert Hoover in 1929. Hoover (also a conservative Republican) did not believe in govt. regulations and wanted the "free market" to govern the economy of the US...based on results of that crash...Republicans were denied the White House for over two decades until they could find a war hero to run in 1952.
Posted by ingrid D | Tuesday, June 24 2014 at 12:59PM ET
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