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Mortgage bankers cringed at the latest litigation cost estimates they could face should the Consumer Financial Protection Bureau craft the Qualified Mortgage rule without a safe harbor.
According to a memo from financial law firm Ballard Spahr to the Mortgage Bankers Association, more challenges would make it to trial under the alternative rebuttal presumption clause.
Based on 76 cases in which the firm represented lenders in similar situations, the average attorney fee for when a case is dismissed totaled $26,000. This goes up to $84,000 under a summary judgment. If it goes to a trial, fees can climb as high as $155,000, Ballard Spahr said.
"The difference in litigation costs between the three stages is substantial, and is rendered more stark by the fact that in most cases the lender had to incur substantial costs to prevail," Richard Andreano and Martin Bryce of the law firm wrote in the memo.
The QM rule will standardize how lenders determine a borrower's ability to repay a mortgage. The CFPB delayed the rule in May and reopened it to comments until July 9 in order to get more input from trade groups and homeowner advocates.
One of the specific questions the CFPB asked in the delay was how much higher attorneys fees would be if it finalized a rebuttable presumption clause under QM.
The clause, according to the latest MBA, would open up lenders to a slew of lawsuits from homeowners challenging the ability-to-repay determination. A safe harbor provision, instead, would give lenders clear standards that if met would be grounds to dismiss any frivolous lawsuit early on.
A rebuttable presumption allows the homeowner to introduce evidence challenging whether the lender met the standard.
Both the MBA and homeowner groups such as the Center for Responsible Lending commented in the latest round in support of broad and "bright line" standards lenders can rely on in order to ease credit from tightened restrictions applied since the crisis.
When lenders venture outside of the QM space, the CRL asked the CFPB to keep the consequences dire against any missteps.
"Non-QM loans should be limited to niche products, with lenders taking full responsibility for the underwriting of these loans," the CRL said in its latest comment letter.
According to the Dodd-Frank Act, damages awarded to a borrower if it is found QM was violated could equal the down payment, statutory damages of up to $4,000, all fees and finance charges on the loan (which for $200,000 mortgage at 4.5% interest could equal $25,000) and the court costs and attorney fees the borrower incurs.
Dodd-Frank also extends how far out from origination the borrower can still sue to three years from one. Borrowers can use also use QM violations as a defense in foreclosure cases filed against them.
Andreano floated out the idea of compromise between the two provisions.
"If, however, a rebuttable presumption were narrowly constructed to limit the issues that may be raised, and thus operate more in the nature of a safe harbor, the rebuttable presumption would enable a more efficient resolution of claims than a typical rebuttable presumption," he wrote.
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