How qualified is your qualified mortgage?

February 27, 2014 at 8:09 am Leave a comment

This is a story about Jack and Diane; two American kids who lost touch after a sordid affair in High School. Each of them go to college, get a job, and are now ready to claim their piece of suburbia by buying their first house.

Jack gets his mortgage from a credit union with assets over $2 billion dollars. Diane gets hers from a small credit union with assets over $25 million. Both of the credit unions make qualified mortgages (QM) to enthusiastic first time homebuyers. This means, among other things, that Jack’s mortgage doesn’t exceed a 43% debt- to-income ratio and his credit union adhered to the prescribed underwriting requirements mandated by Appendix Q. Jack’s credit union had its mortgage department document the borrowers information (remember, the days of the liar loan are over).

Our small credit union gives a QM mortgage to Diane. It also does everything right. It’s a lot easier for it to make a QM loan. For example, Diane had a debt to income ratio around 50%, but the D-T-I cap doesn’t apply to small lenders. Student loans for a Masters in Acting can pile up, but the credit union knows Diane and has made similar loans in the past. Besides, the credit union’s “mortgage department” consists of Bill, a 30 year veteran of making mortgages in the area who has internalized the credit union’s lending parameters but has never had the time or seen the need to translate this knowledge into policies or procedures.

Eighteen months go by and both credit unions have had to start foreclosures. Dodd-Frank has made foreclosure defense a profitable legal specialty, so both Jack and Diane have retained counsel. Both borrowers claim that they have a valid defense to foreclosure because both credit Unions violated Dodd-Frank in being foolish enough to give either of them a loan.

If the law works as envisioned, neither credit union will have anything to worry about. Once they prove they have made Qualified Mortgages the foreclosure defenses fail, right? In theory, yes, but here is my concern. Given the more stringent requirements imposed on larger credit unions, it may actually be easier for larger credit unions to get QM protections than smaller credit unions. The idea behind the safe harbor is that a judge can see by the terms of the mortgage and the mortgage file that a member had the ability to repay a mortgage loan. Given the more stringent limitations placed on our larger credit union, it will be obvious by the terms of the mortgage and the underwriting in the file that Jack had the Ability to Repay the loan when it was made.

In contrast, the same can’t be said of our smaller credit union. For example, was the 50% D-T-I ratio reasonable? Diane’s credit union says it was consistent with past practice, but its underwriting policy simply says it will underwrite to secondary market standards and there is nothing in the file to indicate why an exception was made in this case.

Don’t get me wrong, our small credit union did make a QM loan, but it didn’t have (a) the documentation to prove it and (b) policies explaining its underwriting standards. QM mortgage or not, judges are going to want proof and defense lawyers are going to raise as many questions about the credit union’s policies as they can.

As explained by an extremely smart lawyer in September 2012: “Even a safe harbor isn’t safe. You can always be sued for whether you meet the criteria or not to get into the safe harbor. It’s a bit of a marketing concept there. The more important point is, are we drawing bright lines? If someone were to say to me safe harbor or anything else, I would go with a safe harbor. But I don’t think safe harbor is truly safe. And I think it oversimplifies the issue.” I couldn’t agree more, Mr. Cordray.

The comment period on the Risk Based Net Worth proposal officially kicks in today with the regulation’s posting in today’s Federal Register. I’ll have more on this tomorrow.

Entry filed under: Compliance, Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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