A pair of consumer groups pushed back against mortgage industry representatives in Washington Wednesday over the ability to sue banks over future lending rule violations.
The Consumer Financial Protection Bureau is considering a rebuttable presumption clause under the Qualified Mortgage rule expected to be finalized early next year.
A legal safe harbor grants lenders protection in their foreclosure cases as long as the guidelines under the rule are met. The rebuttable presumption clause would give more borrowers the ability to submit evidence in court that a lender knowingly made an unaffordable mortgage using information rule makers can't anticipate now.
The Mortgage Bankers Association and other groups claim allowing such litigation would mean more cases would go to trial, where litigation costs can grow by as much as seven times the amount if a case was dismissed early on, as would more easily happen under a safe harbor.
Alys Cohen, a staff attorney for the National Consumer Law Center, said litigation risk is still extremely low.
"If the lines are bright and clear it would be easy, but 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)," Cohen said.
According to the NCLC, there were roughly 65 million homes in foreclosure between 2005 and 2010, but in that same time, there were only 60 cases raised to combat the filing using the Truth In Lending Act rebuttable presumption that already exists.
Rarely are borrowers in foreclosure represented by an attorney at all, Cohen added. She cited in her written testimony a Brennan Center for Justice report showing fewer than 15% of borrowers in foreclosure had legal counsel in many counties around the country.
While the Dodd-Frank Act caps possible damages awarded under QM violations to roughly three years of payments, mortgage bankers believe the damage to smaller banks in particular could be severe.
"If you look at the size of the penalties, one infraction can be ruinous to a community bank," said MBA Chairman Debra Stills in testimony, adding that including court and litigation costs, one loss in trial could cost as much as $200,000. "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."
Kenneth Bentsen, executive vice president of the Securities Industry and Financial Markets Association, said a rebuttable presumption could affect secondary market investors as well.
"One is assignee liability. A rebuttable presumption transfers the potential liability of the litigation to the trustee and the investor in the mortgage," Bentsen said. A consequence could be that lenders become overly strict in their underwriting.
But Eric Stein, senior vice president for the Center for Responsible Lending, said where both homeowner advocates and lenders agree — the clear, bright lines provided under the rule — is exactly what would keep litigation costs down for everyone.
"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," Stein said.