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Safe Harbor vs. Rebuttable Presumption

Category: Lending
By PolicyWorks    No Comments

Many credit unions are at the point where they are deciding whether they will make qualified mortgages, ability-to-repay loans, or both.  At the same time, the new rules have caused many credit unions to revisit previous decisions on higher-priced mortgage loans.  A key consideration in this decision-making process is the legal risk and the differing levels of protection given to qualified mortgages and ability-to-repay loans.  Following is an outline of which loans get a safe harbor and which get a rebuttable presumption.

  • Loans eligible for purchase by Fannie or Freddie – safe harbor
  • Loans underwritten in accordance with Appendix Q and meeting the QM product restrictions, including 43% DTI and the points and fees cap – safe harbor
  • Higher-priced loans – rebuttable presumption [Note that the HPML threshold for small creditors under this rule is 3.5 as opposed to 1.5 over APOR] 
  • Loans underwritten in accordance with the ability-to-repay standard – rebuttable presumption

That begs the question – what’s the difference between a safe harbor and a rebuttable presumption?  

 In theory, a safe harbor should protect you from liability and have minimal litigation costs.  In reality, however, plaintiffs’ attorneys can still claim that loans are not qualified mortgages and should not be afforded a safe harbor.  The credit union will then have to prove that it is a qualified mortgage.  Depending on the complexity of the loan, this could involve proving that Appendix Q was followed and a lengthy discovery process.  If the credit union is able to prove that the loan is a qualified mortgage, it will get protection from any liability – the borrower’s claim would be cut off at that point.  The process of proving qualified mortgage status, however, could still involve substantial legal costs. 

For the rebuttable presumption, the credit union will still have the evidentiary issue of proving that the credit union met the ability-to-repay standard.  This will involve proving that the credit union considered the 8 underwriting criteria mandated by the ability to repay rule.  The difference between the safe harbor and the rebuttable presumption is that under the rebuttable presumption, even if the credit union proves that it followed the ability-to-repay standard, the borrower’s claim will not necessarily end there. 

The credit union will get a rebuttable presumption moving forward, but the borrower will still have the opportunity to argue that the credit union did not make a good faith determination that the borrower would have a reasonable ability to repay the loan.  The borrower would have the opportunity to argue that the credit union’s underwriting standards were not appropriate or that the credit union did not appropriately apply its underwriting standards to the borrower’s circumstances.  

In theory, a safe harbor should protect you from liability and have minimal litigation costs.  In reality, however, plaintiffs’ attorneys can still claim that loans are not qualified mortgages and should not be afforded a safe harbor.  The credit union will then have to prove that it is a qualified mortgage.  Depending on the complexity of the loan, this could involve proving that Appendix Q was followed and a lengthy discovery process.  If the credit union is able to prove that the loan is a qualified mortgage, it will get protection from any liability – the borrower’s claim would be cut off at that point.  The process of proving qualified mortgage status, however, could still involve substantial legal costs. 

For the rebuttable presumption, the credit union will still have the evidentiary issue of proving that the credit union met the ability-to-repay standard.  This will involve proving that the credit union considered the 8 underwriting criteria mandated by the ability to repay rule.  The difference between the safe harbor and the rebuttable presumption is that under the rebuttable presumption, even if the credit union proves that it followed the ability-to-repay standard, the borrower’s claim will not necessarily end there. 

The credit union will get a rebuttable presumption moving forward, but the borrower will still have the opportunity to argue that the credit union did not make a good faith determination that the borrower would have a reasonable ability to repay the loan.  The borrower would have the opportunity to argue that the credit union’s underwriting standards were not appropriate or that the credit union did not appropriately apply its underwriting standards to the borrower’s circumstances. 

Although the extent of these risks are largely unknown until we see how the new cause of action plays out in courts, credit unions should still carefully consider the risks to the extent that they can and document their decision-making process.

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