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Dechert LLP

APPENDIX C

Key Considerations for Mortgage Purchasers, RMBS Investors and Investors in Mortgage Finance Entities

  • Which of the three types of loans will a mortgage purchaser or RMBS sponsor or investor want, and at what price?
  • Will RMBS backed by non-QM loans trade at a steep discount to RMBS backed by QM loans?
  • What payment, default, repurchase, foreclosure and transfer risks are inherent in the type of mortgage instrument and the structure of the transaction?    
  • How may a purchaser or RMBS securtizer avoid or allocate indirect liabilities of the mortgage originator? 
  • How will QM Safe Harbor or QM Rebuttable Presumption status apply loan-by-loan and impact risks and pricing?  
  • What loan repurchase terms will govern cases where there are successful challenges to a QM Safe Harbor or QM Rebuttable Presumption?
  • Does the lender have a back-up ATR analysis for QM Safe Harbor loans or QM Rebuttable Presumption loans?
  • If so, is the lender using the same non-QM underwriting process as the basis for its own non-QM loan originations?  
  • What non-QM underwriting standards are being used, and how are they applied to the consideration of individual loans?
  • How do the factors that the Bureau considers to be evidence of whether an ATR determination was reasonable and in good faith apply to an originator’s underwriting standards or to particular non-QM loans?3  
  • How has the lender actually applied its underwriting policies to individual loans, and what controls does the lender have in place to ensure consistent application of policies?
  • What types of representations and warranties will be part of the original loan sale agreement and any subsequent transfer transaction?
  • Will the loans qualify as collateral in Federal Home Loan Bank lending markets, and at what cost?
  • What assistance must the lender provide in the event that loans are subject to challenge under the ATR Rule?
  • What loan repurchase obligations apply, and under what circumstances is each triggered?  
  • What are the potential remedies for breaches of representations and warranties, including monetary damages and other indemnification obligations?  
  • How is a loan purchaser protected if a loan fails to satisfy ATR Requirements and is considered ultra vires?
Footnotes

3 The Bureau has published non-binding factors that a court may consider in deciding whether an originator has satisfied the ATR Requirement. For example, factors supporting an ATR determination include a finding that the lender is using underwriting standards that are based on empirically derived, demonstrably and statistically sound models, and that the underwriting standards have historically resulted in comparatively low rates of default during adverse economic conditions. Factors against an ATR determination include a finding that the underwriting standards have historically resulted in comparatively high rates of default during adverse economic conditions or that the originator has applied its underwriting standards inconsistently.

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