CFPB's Safe Harbor Legal Protections Untested
It will not be enough for a credit union to stand up in court and claim a safe harbor if one of their loans is being challenged. They are going to have to be able to show what they have done and why they did it that way."
Shoring up qualified mortgage safe harbor provisions could require credit unions to double down on their traditional strengths and sharply improve documentation, according to legal experts.
The Consumer Financial Protection Bureau's mortgage regulations offer a measure of legal protection from consumer lawsuits for lenders that fund qualified mortgage loans. So-called QM loans are underwritten to the regulation's standards, including a loan-to-value ratio that ensures the borrower's ability to repay.
But legal experts said credit unions preparing for the implementation of those rules should also take steps to reinforce the regulation's safe harbor provisions.
Credit unions need to take these steps because no one really knows how much deference a court will show these regulations, or how strongly they might stand up in court, the experts said.
“We really don't know how courts are going to treat these parts of the regulations,” said Steve Van Beek, NAFCU vice president of regulatory compliance. He was referring to both the safe harbor offered for qualified mortgages that are no more than 1.5% over an index of annual percentage rates maintained by the Federal Reserve, and the rebuttable presumption offered for higher price mortgages.
Van Beek said that in one scenario, the safe harbor should provide credit unions and other mortgage lenders with the sort of protection that should forestall a plaintiff's attorney from even raising questions about the way the loan was made.
“It should be a slam dunk for the institution,” he said. “But it’s a free country, and everyone has a right to sue.”
And, he said, there are no guarantees a court will honor the rules.
Jared Ihrig, associate general counsel for CUNA, agreed that a great deal is up in the air until courts actually begin to look at the rules. And, he pointed out that the rule’s effective date isn’t until January 10, 2014.
“We really won't know how these things are going to shake out until after credit unions have lived under them for a while,” Ihrig said, agreeing with Van Beek.
But even without knowing what attitude courts might take toward the protections, both Van Beek and Ihrig pointed to several things that credit unions can do to strengthen their positions.
First, credit unions should improve documenting what they do and why they do it when making mortgage loans, particularly when making judgments.
“It will not be enough for a credit union to stand up in court and claim a safe harbor if one of their loans is being challenged,” Van Beek said. “They are going to have to be able to show what they have done and why they did it that way.”
Ihrig agreed, adding that compliance record keeping has always been important, but the CFPB’s mortgage regulations will increase that emphasis.
Robert Shapiro, a principal with the Maryland-based law firm Offit Kurman, and former special adviser to the CFPB, agreed with Van Beek and Ihrig about the importance of documentation and on the uncertainty hanging over the question until courts begin to hear safe harbor cases.
But Shapiro also said credit unions could strengthen safe harbor provisions by maintaining and improving their communications and working with their members.
“This is not the time to cut back on member service,” he said.
Shapiro, who said he is a member of the 5,700-member, $52 million HUD FCU, observed that both credit unions and community banks need to keep building on their strengths as relationship banking institutions, and keep lines of communication open with members to resolve any potential conflicts before they wind up in court.
In many ways, if a matter goes to court at all, small institutions have already lost, Shapiro said, due to the expense and trouble litigation brings.
He also urged credit unions to maintain their lines of communication with the institutions which may eventually purchase their mortgages. Shapiro pointed out that while the safe harbor provisions are generally thought to protect against legal challenges from consumers, they can also extend to potential challenges from loan purchasers should the loan default.