FHA QM Rule Raises Litigation Risk for Lenders

Any loan that meets Federal Housing Administration underwriting standards should be considered qualified mortgage rule compliant and entitled to a safe harbor from litigation, a coalition of five trade groups urges.

In a joint letter, the five trade groups point out that FHA controls the underwriting of the loans it insures. Therefore it is unnecessary to create another layer of costly regulations by making a distinction between safe harbor loans and rebuttable presumption loans.

The proposed rule will impose costs and reduce credit availability for borrowers most in need of FHA credit, according to the Oct. 30 letter to FHA commissioner Carol Galante.

The American Bankers Association, Consumer Bankers Association, Consumer Mortgage Coalition, Independent Community Bankers of America and Mortgage Bankers Association signed the letter.

The QM rule requires lenders to determine whether a borrower has the “ability to repay” a loan. It also creates liability for lenders that violate the rule. The safe harbor is supposed to protect lenders from litigation while the reputable presumption assigned to higher priced loans involves great litigation risk.

In a separate letter, the Consumer Mortgage Coalition says FHA’s underwriting standards currently require FHA-approved lenders to determine the borrower’s ability to repay a loan. And FHA loans should not be subject to ability-to-repay litigation.

“If a loan could qualify for FHA insurance and yet not meet the ability-to-repay requirement, it would suggest a problem with FHA requirements. In that case, revising the FHA requirements nationwide would be the appropriate remedy,” CMC says.