Non-QM Lending The Housing Renaissance 7th Annual Event August 8-9, 2014 Laurence E. Platt K&L Gates LLP 1601 K Street, NW Washington, DC 20006 202.778.9034 Fax: 202.778.9100 larry.platt@klgates.com blog: www.consumerfinancialserviceswatch.com This powerpoint is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.

Mortgage Bankers Association 11/13/2018 Ability to Repay Rule General Requirements Creditor must make a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms Creditor must verify consumers’ ATR using reasonably reliable third-party records Bureau does not dictate a particular underwriting model Mortgage Bankers Association

Mortgage Bankers Association 11/13/2018 Ability to Repay Rule Basis for Determination At a minimum creditors must consider 8 underwriting factors: Current or reasonably expected income or assets Current employment status Monthly payment on covered transaction Monthly payment on simultaneous loan Monthly payment for mortgage-related obligations Current debt obligations, alimony, child support Monthly debt-to-income ratio or residual income Credit history Mortgage Bankers Association

Mortgage Bankers Association 11/13/2018 Ability to Repay Rule Liability / Penalties CFPB - Authority to issue cease and desist orders and impose civil monetary penalties Private Right of Action – Affirmative action for actual damages, statutory damages (individual and class actions), costs and attorney fees, and special damages equal to all finance charges and fees (unless failure not material) 3 year statute of limitations Foreclosure defense - By recoupment or set off No 3 year statute of limitations TILA damages, but special statutory damages limited to no more than 3 years of finance charges and fees Applies to assignees Mortgage Bankers Association

Mortgage Bankers Association 11/13/2018 Ability to Repay Rule Analyzing the Risks of Non-QM Lending Many are looking to expand the credit box to involve non-QM lending if there is an investor who will purchase on reasonable terms. Their thinking goes like this: I’m not worried about class action risk because it will be hard to certify a class based on ability to repay and affirmative claim can’t be made against loan purchasers. A borrower can sue to stop a foreclosure with a federal cause of action irrespective of whether a loan is QM or, if a QM, a higher cost QM. All they have to do is challenge whether a loan is QM or LO comp. Thus, I’m in litigation either way if and when I foreclose. Although my underwriting standards fall outside of QM, I believe that they are prudent, and I will verify income, debt and assets. I will have a paper trail to support my underwriting decision. Mortgage Bankers Association

Mortgage Bankers Association 11/13/2018 Ability to Repay Rule Analyzing the Risks of Non-QM Lending Absent another widespread economic calamity, the default rate will be relatively low. Of that small set of borrowers who default, the majority will qualify for eligible loss mitigation options. Of those who don’t so qualify and are subject to foreclosure, not everyone will challenge the foreclosure, but, assuming they all do, some judges will force the borrower to make a prima facie showing of a violation, not just factual mudslinging. Where a judge initially sides with a borrower, I have a risk of loss, which I might be able to mitigate by giving a loan modification. I’m willing to take the one off risk of loan level claims (and I’m staying as far away from FHA as my feet will take me so I’m not worried about the politics of enforcement). And, as long as I don’t get greedy, the community groups will love me because I’m willing to lend outside of the box. I just need someone to buy the loans! Mortgage Bankers Association

Revision of High Cost Mortgage Loan Thresholds Nobody makes, buys or securitizes “high cost” mortgages because of the assignee liability and enhanced monetary damages. DFA amended the definition of “high cost” loans under HOEPA in various ways: Includes purchase money loans. Total points and fees exceed 5 % of loan, with certain exceptions but broad inclusions. Concern is that pricing the risk to make non-QM loan could trigger high cost rules

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