Can A Qualified Mortgage Violate the Law (edited version)?

March 21, 2013 at 8:56 am 6 comments

NCUA announced this week that it will be hosting a Fair Housing Webinar on April 4.  It has also come out with an industry letter addressing the issue.  Needless to say, housing policy is getting a lot of scrutiny and here’s a reason why.  The first thing any compliance officer learns about lending is that credit unions and banks are legally prohibited not only from making loans that intentionally discriminate against an individual, but also from implementing policies and practices that have the effect of discriminating against a person on an illegal basis, such as the person’s sex, race  or age.

The interesting thing is that a plain reading of the Fair Housing Act (FHA) does not speak of outlawing policies that have the unintentional effect of disproportionately impacting a protected group.  HUD, however, has interpreted the statute this way and by and large the courts have agreed.  So why in February did it promulgate regulations that it says simply codifies existing disparate impact regulations?  In other words, HUD proposed a regulation not to change existing law but to summarize existing law, which it argues, is well settled.  Now, as I like to say, lawyers are paid to be paranoids, but, as Henry Kissinger liked to say even paranoids have enemies.  Something fishy is going on here.

There’s been growing legal analysis lately of a very intriguing question:  can a bank or credit union have a policy of only providing qualified mortgages under the Dodd-Frank Act, which are supposed to be given a “safe harbor” from legal action and still violate HUD’s interpretation of the FHA.  The answer, judging by HUD’s response in the preamble to its regulations, seems to be maybe.  Specifically, during the comment period to HUD’s new regulation, lenders complying with the new Dodd-Frank mortgage requirements questioned whether they will face increased liability as a result of HUD’s interpretation of disparate impact regulations.  The working assumption is that a lending institution that decides simply to provide qualified mortgages may disproportionately impact minority groups that are less likely to meet the stricter underwriting standards.

HUD’s response is not reassuring.  HUD reiterated that a lender is free to defend any allegations of illegal discriminatory effects by meeting its burden of proof demonstrating that there is a legally sufficient justification for its underwriting standards.  It goes on to repeatedly state that nothing has really changed, although it does think that lenders should review their internal lending policies explaining that it hopes its new rule will encourage lenders, who already have analyzed the impact that their policies have on lending decisions, to “review those analyses in light of its new regulations.”

Here’s the problem.  Lenders meeting qualified mortgage standards are not supposed to have a burden of proof imposed on them.  By pointing out lenders are free to meet their burden of proof to demonstrate why a lending policy is legally sufficient, HUD seems to be suggesting that a qualified mortgage policy will still have to be justified where borrowers can show that it has a discriminatory impact on mortgage lending.  So much for the safe harbor.

To be fair, some people argue that this analysis is nonsense.  This is no different from existing law, they argue, where lenders have always had the burden of justifying policies that do have a negative impact on minority groups.  Plus, if Fannie and Freddie are willing to buy a mortgage, it is going to be considered a qualified mortgage, so what’s the big deal.  First, prior to Dodd-Frank, there has never been a federally mandated underwriting standard intended to apply to all mortgages and no lending institution should strive to comply with those standards only to be sued for meeting them.

Second, don’t be so sure that Fannie and Freddie’s underwriting standards won’t face legal scrutiny.  HUD has moved in the past to work with the GSEs when it felt their policies were hurting minorities and lending advocates would presumably be more than willing to do so in the future.

Entry filed under: General.

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6 Comments Add your own

  • 1.  |  September 21, 2013 at 8:23 pm

    Undeniably believe that which you stated. Your favorite reason seemed to be on the net the simplest thing to be aware of. I say to you, I certainly get annoyed while people consider worries that they just don’t know about. You managed to hit the nail upon the top as well as defined out the whole thing without having side effect , people can take a signal. Will likely be back to get more. Thanks!

  • 2. The Day of the Legal Dud | new york's state of mind  |  June 26, 2015 at 8:38 am

    […] Act outlaws intentional discrimination on the basis of a protected characteristic. But does it outlaw practices that have a disparate impact on minorities even when such practices are not motivated by a […]

  • […] is responsible for enforcing the Fair Housing Act. As I’ve written in previous blogs, it interprets this law in its regulations as prohibiting lending practices that are intentionally […]

  • […] interpretation of the FHA. Even with this decision however, analysis of what constitutes a disparate impact is so fact sensitive that you can expect litigation involving this issue for years to […]

  • […] but when their policies and procedures have the effect of discriminating. I’ve been making this prediction for years but this time I think I might actually be […]

  • […] In 2013, HUD promulgating disparate impact regulations. Under the current approach the plaintiff must prove that a challenged practice caused or predictably will cause a discriminatory effect. If this burden is met the lender then has the burden of proving that the challenged practice is necessary to achieve one or more substantial and legitimate non-discriminatory purposes. […]


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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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