Compliance Burden Bearing Down Like A Freight Train
With the Consumer Financial Protection Bureau's ability to repay/qualified mortgage rule's deadline passing in January, will we see the light at the end of the compliance tunnel or another oncoming regulation freight train?
The real question is should CUs only originate mortgages that meet the QM definition or should they also consider originating nonqualified mortgages?
Most of the CUs I have spoken to are going to originate both QM and nonQM loans. I don't necessarily disagree with that strategy and think CUs may be able to fill a need for their members who may be a good credit risk but don't necessarily meet the definition of a QM.
There may also be opportunities to gain new members since not all lenders are going to offer nonQM loans. However, there are two distinct risks that need to be considered: audit risk and legal risk — along with the potential penalties. It is important to note, the small creditor exemption does not exempt any mortgage lender from complying with QM. It only provides them with a slightly broader definition of a qualified mortgage.
Audit Risk seems to be manageable, assuming you have sound underwriting guidelines, adopted board approved policies and procedures, and have sufficient quality control processes to ensure they are adhering to their own guidelines. The CFPB has been urging CUs to continue offering loans that don't meet the QM definition and hinted that they "may" be more lenient to CUs during audit. Perhaps, but remember that the CFPB acronym stands for "Consumer Financial Protection Bureau" and not the "Credit Union Financial Protection Bureau."
The CFPB doesn't want to be blamed for restricting credit and hampering the housing market recovery. It needs lenders to offer nonQM loans. But adopting adopt sound underwriting guidelines, solid board approved policies, and not deviating from those policies will be key. A deviation from your policies not only adds risk to the ATR/QM rule but may open up fair lending issues as well.
Legal risk is the wild card. No one is sure whether there will be a plethora of legal actions for QM violations or if they will be negligible. Loans that do not meet the definition of a qualified mortgage will not receive a legal safe harbor but will come with a rebuttable presumption. (And loans that meet all the guidelines of a qualified mortgage but are considered a high priced mortgage loan also have a rebuttable presumption and do not come with a safe harbor.).
For nonQM loans, the lender must be able to show you have made a reasonable good faith effort that the borrower has the ability to repay the loan. Borrowers that go delinquent or into foreclosure may, with the assistance of their attorney, contend that the lender did not accurately determine they had the ability to repay. During the first three years of the loan, if the plaintiff is successful, they are entitled to recoup all finance charges and fees, as well as reasonable attorney fees.
After three years, the "only" claims a consumer can bring are a set-off/recoupment as a defense to foreclosure.
I recently overheard an executive at a large credit union ask, "What's the big deal? You can be sued now." While that is true, there is now a regulatory framework of vague guidelines and defined penalties on which attorneys can latch.
In its recent semi-annual report to Congress, one of the action items the CFPB said they would be focusing on was educating consumers on their rights and courses of action if they were found to be victims of lenders violating the rules. The late night and daytime show commercials will also come out with attorneys standing by to discuss your rights if "you have been taken advantage of" by your lender. Stay tuned!
Wallace Jones is VP-Training with CU Members Mortgage in Ft. Worth, Texas.