A group of lenders has been testing a new technology that quizzes borrowers to make sure they understand key mortgage information during the loan process, while at the same time, better protecting themselves from the higher compliance risks of non-qualified mortgage loans.
Lenders and investors should understand that when it comes to non-qualified mortgage loans, the main risk is usually not losing a lawsuit, but the costs associated with defending against one, said Ari Karen, an attorney at law firm Offit Kurman, who helped provide the legal basis for the technology.
“You’re going to win most of these cases most of the time. The problem is you’re going to have to spend $100,000 to get there,” he said. “The question is whether you can avoid the lawsuits by bringing sufficient information at the outset of the case, if it does get brought, so that you can get out quickly. You have to give a court something tangible, something concise and inarguable.”
The technology, called QM Review, walks borrowers through short tests that include questions that were developed based on common litigation claims related to ability-to-repay rules such as, “Do you understand you can’t be promised a future refinance?” The technology also incorporates videos to reinforce loan details and borrower understanding, and draws on real-life budgets that borrowers can manipulate to help determine their ability to repay a mortgage.
Such questions are important because in litigation borrowers have commonly said that they only got loans because they, for example, had been promised a later refinance, said Karen. Other common borrower claims include confusion regarding whether the loan is an adjustable- or fixed-rate mortgage.
Underwriters email borrowers the quizzes at three milestones of the origination process, and consumers must answer the QM Review questions to move their loan applications forward.
Together, the three quizzes on average require about 30 minutes of borrowers’ time. If borrowers indicate they have confusion, originators reconnect with them to provide additional information.
In effect, the process trains originators to address key ATR details with borrowers, and helps lenders identify gaps in loan officer training. More importantly, the answers to the automated questions are archived to provide lenders with an audit trail that they can use to prove borrowers were made aware of their loan terms.
The company behind the technology, New York-based Litigation Guard, also plans to offer lenders that use the technology insurance in the event they are subject to a consumer ATR complaint, said CEO Christopher Tiso.