QM Rebuttle Presumtion Causing Waves

By Liz Clinger Updated on 7/12/2012

Washington saw its fair share of push-and-shove on Wednesday when two consumer groups pushed for their right to sue banks regarding lending rule violations in the future.

The consumer group is pushing for change, and it’s coming; the Consumer Financial Protection Bureau will likely be adding a rebuttable presumption clause early next year to the Qualified Mortgage rule.  This new clause would allow borrowers to bring evidence forth in court that a lender deliberately made a mortgage unaffordable.  In previous foreclosure cases, lenders could just cling to a legal safe harbor and would automatically be granted protection - providing that the lender met all the guidelines under the rule.

But this decision wouldn’t come without consequences – it’s likely that this particular piece of litigation would result in an increase of foreclosure cases going to trial.  Groups such as the Mortgage Bankers Association sees this as detrimental because litigation costs for a foreclosure trial can be as much as seven times as a case that is dismissed at the beginning (common under a legal safe harbor).  Staff attorneys at the National Consumer Law Center are still holding firm to the belief that the risk of litigation is small.

The United States is no stranger to foreclosure – between 2005 and 2010 there were around 65 million homes in foreclosure (NCLC).  Yet, despite the high number of foreclosure cases, only 60 cases were brought to court using the already existent Truth in Lending Act rebuttal presumption that has already been in existence.  Borrowers in foreclosure are rarely represented by attorneys.  In fact, according to a Brennan Center for Justice report, fewer than 15% of borrowers in foreclosure have any legal counsel whatsoever.

Cohen comments that if, “the lender had more information that rule writers can’t contemplate now, for example extremely high costs that are documented that they do have access to at the moment of making the loan, that homeowner with a predictably unaffordable loan would have no legal recourse at all (under a safe harbor).”

Any violations of the Qualified Mortgage rule are capped at around three years of payments, thanks to the Dodd-Frank Act.  Several mortgage bankers fear that the damage as a result of the new rebuttable presumption clause could be severe – especially to smaller banks.

MBA Chairman Debra Stills thinks that one violation “can be ruinous to a community bank,” especially when factoring in court and litigation costs – one trial loss could easily cost around $200,000.  Stills also thinks that if you “liken that to the repercussions of a repurchase, those are the same extraordinary numbers that would cause small community lenders not to lend.”

An executive vice president of the Securities Industry and Financial Markets association, Kenneth Bentsen, believes that a rebuttable presumption clause could also have an effect on secondary market investors, to the extent of lenders becoming too strict in their underwriting.  Bentsen believes that “one is assignee liability” and that a “rebuttable presumption transfers the potential liability of the litigation to the trustee and the investor in the mortgage.”    

However, Eric Stein (senior vice president for the Center of Responsible Lending) is a firm advocate for warm and open relations between homeowners and lenders and thinks that clear rules will keep litigation costs low for both parties.

"Putting in place a rebuttable presumption hurdle for borrower litigation gives lenders a considerable litigation advantage but allows a borrower to bring a case when there is a rare, starkly unaffordable QM loan and strong evidence available at the outset," says Stein.