When it comes to qualified mortgages, the difference between a safe harbor and rebuttable presumption is “a bit of a mirage,” Consumer Financial Protection Bureau Director Richard Cordray remarked before the House Financial Services Committee on Sept. 20. For bankers not visiting an arid region of the world, a paper by the law firm of Buckley Sandler shows the difference is more than an illusion.
The Dodd-Frank Act requires banks to make a good faith determination to ensure a customer has a reasonable ability to repay a mortgage loan. The Bureau is preparing its ability-to-repay rule to implement this law. While the rule is still in the comment period, it is clear that the rule will define a qualified mortgage, a type of loan that will be given certain legal protections. The Bureau now must decide if qualified mortgages will be granted protection in the form of a safe harbor or a rebuttable presumption.
While both safe harbor and rebuttable presumption provide legal protection against suits from borrowers, they have very different practical consequences in the legal process. A presumption is an assumption of fact accepted by the court until disproven based on the evidence. The idea is that if a bank’s loan was written in line with the ability-to-repay standards, it will be accepted as a qualified mortgage by the court unless proven otherwise by the borrower. In this case, the borrower has the burden of disproof. At least, that’s the idea.
Unfortunately, the rebuttable presumption approach will mean greater litigation cost and uncertainty for banks when borrowers sue over ability-to-repay regulations. Why? If a borrower sues claiming a bank did not meet ability-to-pay standards, as the Truth in Lending Act allows, then a bank’s presumption is only helpful in later stages of litigation.
An evidentiary standard
In the opening stages of legal proceedings, a bank might make a motion to dismiss a borrower’s suit based on its presumption that it had made a qualified mortgage. But there’s a problem. This first stage of litigation does not allow for the weighing of evidence and presumption is accepted by the court until disproven based on the evidence. For this reason, “courts have usually refused to consider presumptions in favor of the [bank] on a motion to dismiss,” Buckley Sandler said. “A court is not free to engage in broad factual inquiry [at this stage].”
In the cases described by Buckley Sandler, courts have been especially likely to reject the use of presumptions at the motion to dismiss stage in the TILA context. “If qualified mortgage status does no more than create a rebuttable presumption of lender compliance, that presumption will be of limited use at the motion to dismiss stage,” the firm said.
Uncertain in later stages
Unfortunately, in later stages of litigation, presumption suits banks no better. Courts have required varying, and sometime very weak, levels of evidence to disprove a presumption. “Sometimes, a sworn statement is enough,” Buckley Sandler said. “Many courts have held in TILA cases that a [borrower’s] sworn assertion of a contrary fact was enough to defeat the defendant’s rebuttable presumption.”
In one case, a U.S. District Court refused to grant summary judgment to the bank in a TILA notice-of-right-to-rescind case. This refusal came even though the bank produced signed acknowledgments from the borrowers that they had received the required notices. All the borrowers had to do was swear they had not removed any documents from their original closing folder and that the required notices were not in that folder.
There is an even more extreme example of a low standard for disproof at the federal appellate court level. In the only TILA rebuttable presumption case addressed at that level, a borrower claimed that his loan document file had been intact since closing and that his folder did not contain the requisite notices.
Here also, the bank produced a signed borrower acknowledgment that the notices had been given at closing. There was even some suggestion that the folder had not been perfectly preserved. Still the borrower’s sworn assertions, along with his statement that his closing did not follow the lender’s standard closing procedures, was evidence enough for “a reasonable jury to find in [the plaintiff’s] favor,” Buckley Sanders reported.
“In short, a ‘qualified mortgage rebuttable presumption’ might be—at best—a limited and unpredictable tool at the summary judgment stage. Lenders will be unable to determine with certainty what standard of proof will apply and what type of rebutting proof the borrower will offer. And, perhaps most importantly, prior TILA-specific cases suggest the presumption is easily defeated,” Buckley Sanders conclude.
A safer harbor
While it is unclear what kind of safe harbor banks would receive, Buckley Sanders believes banks will likely receive a form of safe harbor called an ‘affirmative defense.’ In this case, “a [bank] could concede all of the facts alleged in an inability-to-repay complaint and still defeat the claim on a showing that the mortgage was a qualified mortgage,” the firm said. An affirmative defense can be used at the motion to dismiss stage but it is even more useful just after the complaint is filed. If the bank properly documented the loan’s qualified mortgage status, the only argument the borrower could make is that the loan did not meet the qualified mortgage requirements.
“Rebuttable presumptions are burdened by unavailability at the early stages of litigation and unpredictability at all stages of litigation. In contrast, safe harbors afford some degree of predictability and expedient resolution. In the qualified mortgage context, these differences are critical,” Buckley Sanders said. The difference is much more than an illusion.