The Mortgage Collaborative Winter Conference The Evolving Non-QM Market: Legal and Operational Risks February 22, 2016 James W. Brody Senior Managing Member American Mortgage Law Group, P.C. Telephone: (415) x151

Notice Important Notice(s): The American Mortgage Law Group, P.C. ("AMLG") makes available the information (the "Information") in this presentation (the “Presentation”) for general informational purposes only. The Information is not intended to constitute, and does not constitute, legal advice. The Information is not intended to constitute, and does not constitute, a solicitation for the formation of an attorney-client relationship. No attorney-client relationship is created through your use of or your receipt of the Information contained within the Presentation. AMLG accepts clients only in accordance with certain formal procedures, and renders legal advice only after the completion of those procedures, and/or completion and execution of an appropriate retainer agreement.

Credit Risk Retention Rule Issued on October 21, 2014 by six federal regulators Board of Governors of the Federal Reserve System Department of Housing and Urban Development Federal Deposit Insurance Corporation Federal Housing Finance Agency Office of the Comptroller of the Currency Securities and Exchange Commission Implements risk retention requirements as required by Dodd-Frank Requires sponsors of securitized transactions to retain risk in those transactions

Credit Risk Retention Rule Defines a “qualified residential mortgage” (QRM) Aligns the QRM definition with that of a qualified mortgage (QM) as defined by the Consumer Financial Protection Bureau (CFPB) Exempts securitizations of QRMs from the risk retention requirement Requires the agencies to review the definition of QRM no later than 4 years after the effective date of the rule with respect to the securitization of residential mortgages and every 5 years thereafter Allows each agency to request a review of the definition at any time Effective Date: December 24, 2015 for residential mortgage backed securities (RMBS) December 24, 2016 for all other classes of asset-backed securities

Credit Risk Retention Rule & Non-QM Lending Rule Requirements: Under the Credit Risk Retention Rule, a sponsor of a securitization, or an originator of RMBS that are not backed solely by QRM must retain a collective retained interest in the securitization of not less than 5% Subject to certain limited exceptions, the rule prohibits the sponsor from transferring this retained interest The rule does permit the sponsor and the originator to allocate the 5% retained risk between each other Issues for non-QM: Many lenders are not able to hold this level of retained risk on their books Smaller, non-bank lenders have an incentive to originate QMs in order to avoid the risk retention requirements that non-QM loans pose Many originators will stay within the guidelines of QM lending to ensure loans are salable and are eligible for securitization

Non-QM Lending Benefits Non-QM does not necessarily mean higher risk Increased Originations/Market Share Opportunity to bring in more business Opportunity to originate loans for a subset of underserved borrowers Increased demand Growth potential Increased Profits Origination fees Higher pricing on non-QM loans Opportunity to cross-market financial services Repeat customers Customer referrals

Non-QM Lending Risks Risk retention and liquidity issues See Credit Risk Retention Rule Slides Salability in secondary market Securitization issues Unknown potential liability Operational risk Legal/Litigation risk Enforcement risk

Mitigating Operational Risks Origination: Document, Document, Document! Institute a clear policy regarding: What types of non-QM loans you will originate What your program criteria are Make sure policy is clearly translated into a set of procedures Allow for quality control reviews Document retention requirements Audit trail to document prudent underwriting Quality Servicing Create a separate set of policies and procedures for servicing non-QM loans Establish strong relationships with non-QM borrowers Identify and remedy potential issues as they arise When engaging in loss mitigation, carefully document borrower’s ability to pay

Litigation Risk: Ability to Repay CFPB’s ability to pay rule (ATR) A qualified mortgage is presumed to meet the ability to repay rule A non-qualified mortgage is not, but it is still subject to the ability repay rule Can be a subjective decision on part of underwriter Especially true when considering alternative collateral or capacity that would not qualify for consideration under a QM loan Potential Liability: Administrative action and CFPB penalties Private borrower liability Class action suits Actions brought by State Attorney General

Litigation Risk: Ability to Repay A lender may not be held liable for a violation of the ability to repay rule if the lender is able to show by a preponderance of the evidence that: The violation was not intentional, and The violation resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such an error 3-year statute of limitations on ability to repay claims brought as affirmative cases After 3 years, consumers can bring ability to repay claims only as setoff/recoupment claims in a defense to foreclosure

Mitigating Legal Risks Document, Document, Document! Lay out clear program criteria Follow those criteria to the T Document it every step along the way If you end up in litigation regarding a non-QM loan and the borrower’s ability to repay, your loan file and the documents within will become your lifeline Do the work up front to populate a perfect package that will help you down the line

Future Litigation Risk: Unknowns Because non-QM loans are not highly regulated we don’t fully know the extent of risks and repercussions that come with them Fear of unknown risks and liabilities keeps lenders and investors away The way to get answers to exactly what those risks and liabilities are is through litigation Litigation will create rules that will provide greater clarity, decrease lingering risks, and open up the market

Non-QM Lending: Balancing Risk v. Reward Business judgment call specific to each lender Risks Risk Retention/Liquidity Potential Salability Issues Intangible Unknowns: Litigation Risk, etc. Rewards Increased Market Share Higher ProfitsNew Customers

Thank You Contact Information: James W. Brody, Esq., Managing Member American Mortgage Law Group, P.C. 75 Rowland Way, Ste. 350, Novato, CA Telephone: (415) x151

James W. Brody As a Managing Member, Mr. Brody actively manages complex mortgage banking mitigation and litigation matters for the American Mortgage Law Group, P.C. (“AMLG”) and its diverse clientele (e.g., national mortgage lenders, warehouse lenders, secondary market investors, loan servicing companies, Wall Street banking firms and insurers). Being one of the AMLG’s founding attorneys, Mr. Brody has been instrumental in the Firm’s development and in its continued success. Mr. Brody has successfully resolved hundreds of mitigation and litigation cases that involve complex mortgage fraud schemes, as well as large-scale repurchase and/or make-whole disputes. Mr. Brody’s experience centers on those legal issues that arise during and through loan originations, loan purchases/sales, loan securitizations, foreclosures/ bankruptcy actions, and repurchase/make- whole claims. Mr. Brody received his B.A. in International Relations from Drake University in He also received his J.D., with a certified concentration in Advocacy, from the University of the Pacific, McGeorge School of Law in In addition to being admitted to practice law in all State and Federal Courts in CA, Mr. Brody has served as lead litigation counsel for numerous mortgage banking and commercial related disputes venued in both State and Federal Courts, in a direct capacity or on a pro hac vice basis, in AZ, CA, FL, MD, MI, MO, OR, NJ, NY, PA, TN, and TX. Mr. Brody has made numerous media appearances and industry presentations regarding the prevention, detection and resolution of mortgage fraud matters. In addition, Mr. Brody continues to be a featured speaker in the area of repurchase and make-whole claims. Mr. Brody may be reached at or at

Brief Introduction to American Mortgage Law Group, P.C. AMLG is a nationally recognized full suite mortgage banking law firm that represents a diverse clientele (e.g., mortgage lenders and servicers, commercial banks, thrifts, savings and loan associations, credit unions, title companies, third-party vendors, etc.), both in and out of court, either directly or in a pro hac vice capacity, all across the country. We focus on: Mortgage Repurchase and Indemnification Defense & Workout Litigation & Mitigation Regulatory Compliance & Examinations White Collar Defense Public Speaking and Education at Conferences