Community Bankers of Iowa Monthly Banker Update June 2014 | Page 13

Ability to Repay and Qualified Mortgage Risks: Part 2 of 3
Written By: R. Jeff Andersen - Attorney, Dickinson Law
As outlined in Part 1 of
this series, the abilityto-repay rule creates a
new cause of action for
borrowers if a bank failed to make a good faith determination of
the borrower’s ability to repay the loan. There are two primary
standards that banks can follow to prove they made a good
faith determination of the borrower’s ability to repay – the
qualified mortgage standard and the ability-to-repay standard.
Depending on the standard used, a loan will get either safe
harbor protection or a rebuttable presumption of compliance
with the ability-to-repay rule. See Part 1 for an outline of the
types of loans that will qualify for each standard. Here in Part 2,
we will discuss the difference between safe harbor protection
and a rebuttable presumption.
Safe Harbor
As discussed in Part 1, qualified mortgages are generally
afforded safe harbor protection from borrower ability-to-repay
claims while using the ability-to-repay standard gives the bank
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 bank will then have to prove that it is a qualified
mortgage. Depending on the complexity of the loan, this
could involve a discovery process and proving that Appendix
Q was followed. If the bank 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
some legal costs. An extremely simplified example of how the
safe harbor could arise is as follows:
1. Borrower fails to make mortgage payments
2. Bank forecloses on borrower
3. In foreclosure, borrower raises defense/counterclaim of the
bank’s failure to properly consider the borrower’s ability to
repay
4. Bank asserts that the loan is a qualified mortgage
5. Borrower has the opportunity to refute QM status
6. Bank proves QM status
7. Borrower’s ability-to-repay defense/counterclaim is
dismissed.
Rebuttable Presumption
For the rebuttable presumption, the bank will still have the
evidentiary issue of proving that the bank met the abilityto-repay standard. This will involve proving that the bank
considered the eight 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 bank proves that it followed the abilityto-repay standard, the borrower’s claim will not necessarily
end there. So in step 7 in the example above, the borrower’s
defense/counterclaim will not necessarily be dismissed –
instead a rebuttable presumption which the borrower must
overcome will be established.

Once the rebuttable presumption is established, the borrower
will still have the opportunity to argue that the bank did not
make a good faith determination that he or she would have
a reasonable ability to repay the loan. The borrower would
have the opportunity to argue that the bank’s underwriting
standards were not appropriate or that the bank did not
appropriately apply its underwriting standards to the borrower’s
circumstances. Banks will need to be prepared to demonstrate
that after considering debt and income, the borrower had
sufficient residual income to pay the mortgage loan and meet
living expenses.
Although it is not clear how courts will interpret and apply the
ability-to-repay / qualified mortgage rules, defending an action
with the ability-to-repay rebuttable presumption instead of the
qualified mortgage safe harbor will likely involve additional legal
cost and risk. As courts begin to address the ability-to-repay
rules, the process, costs, and risks involved in an ability-torepay action should crystallize.
With so much uncertainty surrounding this new borrower cause
of action, it will be difficult for banks to fully analyze the risks.
Although you may not be able to exactly quantify the risks,
you can analyze the bank’s volume of foreclosures and other
loans in collection where the ability to repay action may arise.
This volume can be analyzed in light of the following CFPB
guidance as to what factors may be evidence that a bank made
a reasonable and good faith determination of ability to repay:
(i) the consumer demonstrated actual ability to repay
by making timely payments for a significant period after
consummation, (ii) the creditor used underwriting standards
that have historically resulted in comparatively low rates
of default during adverse economic conditions, or (iii) the
creditor used underwriting standards based on empirically
derived, demonstrably and statistically sound models.
Conversely, the CFPB states that the following factors, among
others, may be evidence that