Federal regulators have issued aninteragency statement intended to address industry concerns regarding the fair lending risks associated with compliance with the Consumer Financial Protection Bureau’s ability-to-repay/qualified mortgage (QM) final rule. The rule becomes effective on January 10, 2014. In addition to the CFPB, the other regulators issuing the statement were the Office of the Comptroller of the Currency, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA).
In particular, industry members had expressed concern about their potential exposure to disparate impact liability under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA) for making only or primarily QMs. They sought guidance on whether and to what extent compliance with QM requirements would be considered a legitimate business need that would provide a defense to disparate impact claims. The statement advises creditors that the regulators “do not anticipate that a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.”
The statement includes a discussion of ECOA fair lending principles and indicates that the agencies with FHA supervisory authority (the Federal Reserve Board, FDIC, and NCUA) “believe that the same principles” apply to FHA compliance. The regulators indicate that they expect creditors to “consider demonstrable factors that may include credit risk, secondary market opportunities, capital requirements, and liability risk” when selecting their business models and product offerings and “understand” that creditors “may have a legitimate business need to fine-tune their product offerings over the next few years in response [to the ability-to-repay/QM rule and changes in market conditions].”
The regulators also note that the decisions presented by the ability-to repay/QM rule are similar to the decisions creditors faced upon the adoption of the “high-cost” and “higher-priced” mortgage loan rules. They indicate that they are “unaware of any ECOA or Regulation B challenges” to decisions some creditors made to stop offering such loans.
While helpful, the statement’s benefit for creditors is quite limited because other factors must be “absent” for a creditor making only QM loans not to have an elevated fair lending risk. Most notably, creditors still face the possibility of fair lending challenges to their application of QM standards to protected class applicants. The statement cautions creditors to “continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems.” Also, neither the U.S. Department of Justice nor the U.S. Department of Housing and Urban Development participated in the statement.
Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm's Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
For more information, please contact Consumer Financial Services Practice Leader Alan S. Kaplinsky at 215.864.8544 or firstname.lastname@example.org, Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or email@example.com, John L. Culhane, Jr., at 215.864.8535 or firstname.lastname@example.org, or Christopher J. Willis at 678.420.9436 or email@example.com.
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