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From Banking and Finance Law Daily, October 22, 2013

Offering only qualified mortgages will not alone create fair lending violation risk

By Richard A. Roth, J.D.

A financial institution’s decision to offer only mortgage loans that meet the criteria for Qualified Mortgages under the Consumer Financial Protection Bureau’s rules will not automatically be considered to violate equal credit opportunity or fair housing requirements, according to the federal bank, thrift, and credit union regulatory agencies. An interagency statement by the CFPB, Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, and National Credit Union Administration advises lenders that the Qualified Mortgage rule, which takes effect in January 2014, does not present risks that are significantly different from those that were caused by other past regulatory changes.

As described by the interagency statement, the Dodd-Frank Act tells the CFPB to adopt rules requiring mortgage lenders to make a reasonable, good-faith determination that a borrower can afford to repay a loan. One way to satisfy the Ability-to-Repay rule requirement is by making a loan that meets the Qualified Mortgage criteria.

Lenders have raised a concern that an institution that decides to “play it safe” by making only Qualified Mortgage loans could run afoul of the Equal Credit Opportunity Act and Regulation B (12 C.F.R. Part 1002). An important mechanism of the law and the regulation is the disparate impact doctrine, also referred to as the “effects test,” which says that a practice can be prohibited if it has a disproportionately negative effect on a prohibited basis, even if the lender has no discriminatory intent (see 12 C.F.R. 1002.6(a) and the associated staff comment). The concern is that deciding to make only Qualified Mortgages could have a disparate impact.

No conflict between rules. Regulation B and the Ability-to-Repay rule are not in conflict, the agencies say. The ECOA and Regulation B permit lenders to act “on the basis of their legitimate business needs,” the agencies say. Even the disparate impact doctrine allows lending practices that have a negative impact if those practices meet a legitimate business need that cannot be achieved in a way that has a less disparate result.

The interagency statement concedes that some lenders might choose to make only Qualified Mortgages, especially when the Ability-to-Repay rule first becomes effective. The implementation of the rules, as well as other changes, will have “real world impacts” that will require lenders to adjust their practices in the next few years.

Moreover, some lenders already make only Qualified Mortgages, the statement points out. A lender that originates only mortgages it can sell on the secondary market may find that the mortgages all are qualified because they meet a transitional criterion—they are eligible to be bought or guaranteed by Fannie Mae, Freddie Mac, or another government program.

Comparable regulatory changes. The Ability-to-Repay rule is not the first time that lenders have faced regulatory changes, the statement observes. When rules on higher-priced mortgage loans took effect in July 2008, some lenders stopped offering those products. Similarly, some lenders stopped offering mortgage loans that were subject to the Home Ownership and Equity Protection Act after its implementing regulations took effect. “We are unaware of any ECOA or Regulation B challenges to those decisions,” the statement says.

Fair Housing Act. The CFPB does not have regulatory authority over the Fair Housing Act or its implementing regulation, 24 C.F.R. Part 100. However, the other four agencies say that the same principles apply to those requirements.

MainStory: TopStory ConsumerCredit EqualCreditOpportunity Loans Mortgages TruthInLending

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