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Mortgage Lending: 7.2.3.3.3.3 Presumption of compliance and state law claims

Qualified-mortgage status should not foreclose an inquiry into whether, under state law, the loan was foreseeably affordable or otherwise abusive.159 Practitioners should remember that the Dodd-Frank Act merely requires an assessment of ability to repay; it does not require that loans actually be affordable. It is entirely possible that a creditor could know that a mortgage was foreseeably unaffordable and make the loan anyway.

Mortgage Lending: 7.2.3.3.4 Qualified residential mortgages and credit risk retention

Among other provisions designed to reduce reckless lending, the Dodd-Frank Act also requires sponsors of mortgage-backed securities to retain five percent of the risk that a mortgagor will default—unless the mortgage loan meets the definition of a “qualified residential mortgage.”160 Six federal agencies jointly issued the Credit Risk Retention rule in December 2014 to implement this requirement, effective February 2015.161

Mortgage Lending: 7.2.3.5 Other Sources of Industry Standards

In addition to the statutes, regulations, and guidance promulgated by legislatures and banking agencies, there are other basic industry standards applicable to consumer mortgage loans.181 Some examples of these standards can be found on the websites of major participants in the mortgage marketplace, such as Fannie Mae,182 Freddie Mac,183 the FHA,184 and the VA

Mortgage Lending: 7.2.4.2 Measuring Income; Grossing Up

As a general rule, creditors look to pre-tax, or gross, income when measuring affordability. The question then arises how to account for non-taxable income, such as Social Security income or Supplemental Nutrition Assistance Program (SNAP) benefits. If one compares two homeowners with the same dollar amount of income—one with only taxable employment income and the other with only non-taxable public benefits income—the one with only non-taxable public benefits income will have more dollars to spend because that homeowner will not have to also pay taxes.

Mortgage Lending: 7.2.5.1 Verification of Income and Expenses

Verification of income has always been a standard and essential part of underwriting.241 The amount, source, and reliability of the income should all be verified.242 But, in the years leading up to the subprime mortgage meltdown, the prevalence of loans without documentation, or with only limited documentation, undermined this essential element of underwriting.243 Even when creditors claimed to be verifying income, they often cut corners, rel

Mortgage Lending: 7.2.5.2 Special Considerations for Stated-Income Loans

Stated-income loans, or “no-doc loans,” are loans made without documentation or verification of the borrowers’ income. Even if borrowers submit documentation of income, it will be ignored.256 These loans are sometimes referred to as “liars’ loans” because of the opportunity they afford for dishonest behavior.257 Related to stated-income loans are reduced documentation loans, for which lenders require only limited documentation of income, such as bank statements or tax returns.

Mortgage Lending: 7.2.6.1 The Nature of Risk in Nontraditional Mortgage Products

A common feature among the complex, risky mortgage products that drove the subprime mortgage collapse in 2007 was an adjustable interest rate. By 2006, adjustable rate mortgages (ARMs) accounted for eighty percent of all subprime mortgage originations.278 Many of these ARMs had interest rates that could only adjust upward from their initial rate. That is, the contract established the initial rate as a floor below which the interest rate could never fall.

Mortgage Lending: 7.2.6.2.1 Problems of measuring affordability in non-standard mortgages

Adjustable rate mortgages (ARMs) and non-standard products present particular problems for measuring ability to repay. An ARM can start out as affordable, only to double in cost in a few years when the rate resets. Many courts have been skeptical of the affordability of ARMs, particularly when combined with initial “teaser” rates and prepayment penalties that prevent affordable refinancing.288

Mortgage Lending: 7.2.6.2.2 Banking agency guidance on standards of affordability for ARMs and nontraditional mortgages

As early as 1997, the Office of the Comptroller of the Currency (OCC) recognized that adjustable rate mortgages lead to high rates of default.293 The OCC recommended that lenders consider the credit risk of ARMs: “At a minimum, the impact should be weighed in terms of both annual and lifetime caps.”294 In other words, when underwriting loans, lenders were to pay attention to the maximum possible payment.

Mortgage Lending: 7.2.6.2.4 Dodd-Frank standards of affordability for nontraditional mortgages

Interest-only and negatively amortizing loans are not generally eligible for any presumption of affordability under the Dodd-Frank Act ability-to-repay rules.303 The CFPB underlined its basic skepticism about the affordability of these nontraditional mortgage loans by allowing eased requirements for measuring a borrower’s ability to repay when a new creditor is refinancing an adjustable rate, interest-only, or negatively amortizing loan into a fixed rate, fully amortizing mortgage.304 In oth

Mortgage Lending: 7.2.7.1 Overview

Courts have recognized that the practice of lending without regard to the borrower’s ability to repay is a per se unfair and deceptive act or practice.308 This may be the case even when the loan was a refinancing of an earlier loan that was, itself, unaffordable.309 Failure to follow the basic precepts of underwriting for affordability and sustainability can subject the originating creditor, the assignee,310 or even the investment banks who f

Fair Credit Reporting: 17.1.1 Nature of Credit Repair Organizations

Financially-troubled consumers are attracted to solicitations from credit repair organizations. These organizations, calling themselves “credit repair” or “credit service” agencies, “credit clinics,” or similar titles, promise consumers that for a fee,1 negative items will be eliminated from a credit history.

Fair Credit Reporting: 17.1.2 Overview of Credit Repair Laws

The federal Credit Repair Organization Act (CROA) was adopted in 1996.14 CROA’s broad definitions and prohibitions make it applicable not just to traditional credit repair organizations, but probably to a wide range of other entities as well.15 It offers a private cause of action with powerful remedies.

Fair Credit Reporting: 17.1.3 The Surprising Reach of Credit Repair Laws

A signal characteristic of state and federal credit repair laws is their surprising reach. The federal statute includes a broad definition of “credit repair organization” that may apply to credit counseling agencies, debt settlement providers, debt collectors, retail sellers, and other entities that are not traditional credit repair organizations.25 Moreover, many of the federal statute’s prohibitions apply to any person, not just credit repair organizations.26

Fair Credit Reporting: 17.2.2.2.1 Broad definition covers wide array of entities

The Credit Repair Organizations Act contains an exceptionally broad definition of “credit repair organization.”43 A credit repair organization is:

[A]ny person who uses any instrumentality of interstate commerce or the mails to sell, provide, or perform (or represent that such person can or will sell, provide, or perform) any service, in return for the payment of money or other valuable consideration, for the express or implied purpose of—

Fair Credit Reporting: 17.2.2.2.2 “In return for the payment of money or other valuable consideration”

To be a credit repair organization, the organization must offer or provide its services “in return for the payment of money or other valuable consideration.”59 To meet this requirement, some courts require that the consumer pay additional consideration for the credit repair services, separate from any fee for other goods or services.60 However, when the cost of the credit repair service is bundled with fees for other services, the fact that a fee is not paid separately is unlikely to defeat coverage

Fair Credit Reporting: 17.2.2.2.4 Types of services and advertisements that meet the definition

An entity is a credit repair organization even if its services are offered for the implied rather than the express purpose of credit repair.73 A contract that implicitly promises to attempt to improve the consumer’s credit record, history, or rating falls within the definition, even if it uses phrases from the FCRA and other consumer protection statutes to describe the services that will be performed and even if it states that the contracting party is not a credit repair organization.74