Lenders Take First Round of ATR/QM Litigation
Mortgage Industry Insight: One of the great things about SCA is the range of issues we get to see, and the wealth of knowledge we get to tap into while working with dozens of clients on a monthly basis. Today, we'll share some information about recent ATR/QM Litigation.
By Gregg Oberg:
Ability-to-repay (ATR) and Qualified Mortgage (QM) regulations first became effective over five years ago. While the monetary consequences to lenders of failing to reach a “reasonable, good-faith determination” of ATR prior to origination are certainly large; the complete lack of certainty in how the regulation might be interpreted in a consumer driven lawsuit has been a looming risk factor.
In March of 2019, an Ohio Federal Court (S.D. Ohio) ruled in favor of First Federal Community Bank of Bucyrus in a lawsuit brought by a plaintiff undergoing divorce proceedings at the time of the loan origination. At issue in this suit was the reasonableness determination made by the bank with respect to Elliot’s DTI. Elliot alleged his spousal support should not have been considered, and thus his DTI exceeds the 43% threshold.
In Elliot, a married couple who had spent decades in real estate brokerage were under a separation agreement at the time the loan was originated. Elliot applied to refinance joint credit on a property pursuant to that agreement to remove his wife’s name and hold title by himself. The terms of their separation agreement entitled Elliot to spousal support of $2,200 a month.
The bank, following the guidelines of Appendix Q, considered his income to reach a determination of whether he would likely be able to make payments. In considering income, the bank relied on the following monthly figures(rounded):
Base Income of $529;
Spousal Support of $2,300 (immaterial confusion in case, may be $2,200);
Social Security of $1975; and
Rental Income of $1400.
Although the bank initially rejected the application, subsequent due diligence obtained documents and statements sufficient to satisfy bank management of the safety of the loan. Based on these figures, the bank determined Elliot’s DTI was just under 38%, and thus meets the standards. Elliot obtained his refi. However, when the divorce was finalized Elliot’s spousal support was reduced to $250 per month. Elliot subsequently brought suit claiming the bank failed to reach the required “reasonable, good-faith determination.”
The Court’s Opinion
Widely viewed as a win for industry, the court determined the bank’s due diligence, documentation, and procedure used to evaluate Elliot under Appendix Q guidelines met the expectations of the ATR/QM Rules. Because the exponential decrease in spousal support “was not an event that was reasonably foreseeable by the Bank[,]” the court dismissed the suit and found for the bank.
What Elliot Tells Us
For one, it reinforces the importance of following proper procedures. The bank did everything it was required to do in terms of diligence, and considered income in line with Appendix Q. What the court is telling us (in the words of a colleague) is that lenders are not required to be fortune tellers. Bottom line, the court reinforced that ATR/QM determinations are evaluated on information at or before consummation.
But what does this mean in terms of risk to lenders? Honestly, not much. While having a precedent on record certainly gives legal teams confidence in their interpretations, nothing new was said in Elliot. It was just somebody different saying it—namely the courts, not the regulators. If you’re already paying attention, this ruling changes nothing.
Just my opinion, but Elliot is my favorite new case for driving home the importance of procedure. Here an institution followed a procedure to the tee, and were rewarded for doing so. Guess that’s what “good faith” is.
Read the case yourself: https://docs.justia.com/cases/federal/district-courts/ohio/ohsdce/2:2017cv00042/199511/81
Spillane Consulting Associates has served the residential mortgage lending business since 1991. We have specialized in mortgage banking consulting services and provided quality control reviews, risk management and process consulting and employee training to credit unions, community banks and non-depository institutions. We are a thought leader on the strategic growth of residential mortgage lending. You can learn more by visiting our website, or scheduling a meeting with me or one of my colleagues.
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