Many lenders touting so-called safe origination practices for loans made outside the legal safe harbor for "qualified mortgages" are relying upon practices that are simply insufficient to protect them legally.
Most are using approaches that focus upon one particular area of risk (ignoring the others). In some cases lenders are also using “safeguards” that regurgitate old protections that did not work before and will not work in the future.
For instance, lenders relying upon 24 months of bank statements to verify income on a non QM loan may well be guarding against claims that the lender did not verify income. However, if the borrowers' true expenses are not accounted for, the income-based verification will not establish the ability to repay as it examines only one part of the equation.
Other lenders are using forms for borrowers to sign to certify the borrower’s ability to repay. Such disclosures are more of the same documents that get added to the stack that borrowers have to sign to get the loan and they suffer the same shortcomings that made them ineffective in the past.
Even a residual income analysis, standing alone, does not offer the necessary protection. Such an analysis does not guard against the “I did not understand” or “they did not tell me” claims that would enable borrowers to back-door into a non QM-based defense.
Indeed, if a borrower claims the lender failed to explain a loan was adjustable or that the good faith estimate was filled out after they signed it, or that they were promised a refinance —all of these claims will allow a borrower to assert an ability to repay defense to a non QM loan as an alternative theory for a jury to consider. A jury that believes a borrower was misled will have little problem concluding that the lender lacked the requisite belief in the borrower’s ability to repay.
The bottom line is that in order to safely originate a non QM loan, a lender needs to develop procedures that better document the loan file, utilize third party or independent oversight, and address income/expenses in a common sense matter that allow average persons to recognize the lender was legitimately trying to make the right decision.
“Good faith" is not difficult to demonstrate as long as the procedures that lead to the decision are demonstrably above board and insulated from self-interest.