By Jeff Andersen
The ability-to-repay rules add a new cause of action available to consumers that raises new risks for credit unions. Credit unions have two primary ways to comply with the new rule and defend against this new action: qualified mortgages (QMs) and ability-to-repay (ATR). The QM standard involves more stringent product and underwriting criteria. For example, points and fees cannot exceed three percent of the total loan amount for loans over $100,000, the debt-to-income ratio cannot exceed 43% and QM/ATR rule Appendix Q (appendix containing the standards for determining monthly debt and income) must be used to underwrite the loan. The benefit of getting QM protection is that you will get safe harbor protection from litigation under the new rule.
The ability-to-repay standard is a less restrictive underwriting standard and does not have the product and pricing restrictions present in the QM standard (such as the points and fees and debt-to-income ratio cap.) The ability-to-repay standard requires the credit union to consider eight factors but does not mandate specific underwriting standards—credit unions are still free to develop underwriting standards that fit the needs of the credit union and its members. Because it is less restrictive, you get a lesser legal protection; instead of a safe harbor, you get a rebuttable presumption.
This new rule requires a credit union to make numerous business decisions and to assess the risks associated with such decisions. The difficulty comes in the impossibility of being able to fully assess the risks because of the uncertainty in knowing how courts will treat QMs and ability-to-repay loans. I have outlined some key decisions that may be triggered by the new rules and a general description of the risks inherent in such decisions below. Note that these are just opinions and your individual risk assessment may vary considerably.
Qualified Mortgage v. Ability-to-Repay
Safe Harbor v. Rebuttable Presumption
In theory, a safe harbor should protect your credit union from liability and have minimal litigation costs. In reality, however, plaintiffs’ attorneys can still claim that loans are not QMs and should not be afforded a safe harbor. The credit union will then have to prove that it is a QM. Depending on the complexity of the loan, this could involve proving that Appendix Q was followed and a lengthy discovery process. If the credit union is able to prove that the loan is a QM, it will get protection from any liability and the borrower’s claim would be cut off at that point. The process of proving QM status, however, could still involve substantial legal costs.