Point of Law: Consumer-Friendly Lending

Credit unions have long been known for being consumer-friendly. As a movement, we’re all about the little guy. So it’s not surprising that credit unions may benefit from following the actions of the Consumer Financial Protection Bureau. While the new agency officially regulates only a handful of credit unions—those with assets of $10 billion or more—the National Credit Union Administration, which regulates all CUs with federal charters, is expected to follow the new agency’s lead on many matters.

For example, in January 2014, CFPB and NCUA (in Letter to Credit Unions 14-RA-01) started requiring creditors that offer mortgage loans to implement a complex array of mortgage loan underwriting standards. These standards help to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. A key element of the guidance requires lenders to match a mortgage to a borrower’s “repayment ability” before granting the loan—or face legal exposure.

Three Types of Mortgages

The “ability to repay” rule provides that “[a] creditor shall not make a loan ... unless the creditor makes a reasonable and good faith determination at or before consumption that the consumer will have a reasonable ability to repay the loan according to its terms.” The rule then categorizes mortgages into three types, each with different legal exposures.

Mortgages are categorized as either:

1. a qualified loan, one that “complies with the repayment ability requirements”;
2. a “higher priced” qualified loan that is tied to a “rebuttable presumption” (essentially a legal defense showing a CU has done its homework that the mortgage meets the ability to repay rule); and
3. a “non-qualified” loan that carries no legal defense that it meets the ability to repay mandate.

To successfully challenge the rebuttable presumption associated with a “higher priced” mortgage, a challenger must prove that “... the creditor did not make a reasonable and good faith determination of the consumer’s repayment ability at the time” of the loan’s consummation.

It’s clear that both higher priced mortgages and non-qualified mortgages may be subject to challenge. However, a qualified mortgage may be as well. A debtor’s attorney can try to demonstrate that the underlying criteria, which arguably served as the predicate for the mortgage’s categorization as “qualified,” were in fact deficient in one way or another. Illustratively, a challenger may attempt to demonstrate that what the credit union calculated as a 43 percent debt-to-income ratio was, in fact, 51 percent.

Defense for Lenders

Should a credit union’s ability to repay defense fail, the Truth in Lending Act provides basic governmental and individual civil liability claims that have been further expanded under the Dodd-Frank Act. Beyond the money damages originally an element of TILA, new exposures related to the ability to repay rule were created.

For example, in a case of an ability to repay rule violation, a borrower can institute a claim of “setoff” or “recoupment”—that is, the borrower can obtain, among other remedies, damages equivalent to three years of finance charges and fees paid relating to the mortgage loan. Take note, no statute of limitations exists! TILA establishes the amount of the borrower’s claim, including attorney’s fees.

Disparate lending that violate the Equal Credit Opportunity Act also may come into play here. An interagency statement of regulatory guidance states that the regulators would “...not anticipate that a creditor’s decision to offer only qualified mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.” This does not preclude private plaintiff’s counsel from charging improper lending practices based on an institution’s policy of offering only qualified mortgages.

A third avenue of action against lenders may be regulators’ charges that non-qualified mortgages are being made using “unsafe and unsound” practices. A regulator could assert that the underwriting process and the types of loans being offered/made deviate from the standards set forth by CFPB so much that the mortgages are imprudent.

Finally, there is the question of what rights buyers of the mortgages will have, if it turns out the loans were sold with warranties and representations that the debts were qualified mortgages. Put simply, purchasers will no doubt have the entitlement not only to sell the mortgages back to the originator but also, to the extent that they were charged with liabilities, seek indemnification for any payments they are obligated to make.

The legal risks associated with different types of mortgages under CFPB’s new rule will help inform directors and managers about what loans the credit union should make available to members. Plain and simple: Qualified mortgages vastly limit legal liabilities, without eliminating every potential problem. Non-QMs may provide the opportunity for sought-after institutional benefits, but, at the same time, carry expanded legal and financial risk.

CUES member Stephen A.J. Eisenberg is EVP/general counsel for $17 billion Pentagon Federal Credit Union, Alexandria, Va.