Guidance Provides Clarity; But Stormy Weather Is Ahead For Fair Lending Regulation

October 23, 2013 at 8:03 am Leave a comment

Since the CFPB unveiled its Qualified Mortgage regulations that take effect in January, a once esoteric question obsessed over by legal geeks has been the following:  can a lending institution exclusively provide mortgages that constitute Qualified Mortgages under the CFPB’s regulations and violate fair lending laws?  Yesterday, several agencies, including the NCUA, answered this question with a qualified no, but their guidance underscores why fair lending laws are going to be a prominent area for compliance officers and lawyers in the months and years to come.

Since many of you read this blog when you get to work and have not yet finished your second cup of coffee, I’ll provide you a quick primer on the QM ability to repay distinction one last time (promises, promises).  All mortgages must now be granted only after the lender can document why the borrower has the ability to repay the mortgage loan.  While so-called ATR mortgages receive no special legal protections in the event that a borrower contests a foreclosure, so long as the credit union can document that it has taken basic underwriting criteria into account, the credit union will be on solid legal ground.  In contrast, qualified mortgages are mortgages that meet specific criteria outlined by the regulations.  For example, to be a QM a borrower must have a maximum debt to income ratio of 43%, points and fees that generally exceed no more than 3% of the mortgage loan (although this varies depending on the size of the mortgage), or be eligible for sale to Fannie or Freddie.  QM mortgages receive important legal protections, at least in theory, for which ATR mortgages do not qualify.  If the system works as envisioned, a delinquent home buyer will have no defense to a foreclosure on a documented QM mortgage.

Which brings us to the nub of today’s blog.  The Equal Credit Opportunity Act outlaws credit practices and procedures that have the effect, whether or not intended, of disproportionately impacting people on the basis of, among other things, race, sex, national origin and age.  Now, let’s say you’re a bank or credit union that decides that the best way to comply with all these new Dodd-Frank requirements is to just make QM mortgages.  The simple truth is that this policy shift would have a disparate impact on minority groups since the more stringent criteria puts groups of people who have, in the aggregate, less financial means at a disadvantage.  Will lending institutions be violating the law by shifting to QM only mortgages?  At least according to this group of regulators, the answer is probably not.  Specifically, the guidance provides as follows:  “the Bureau does not believe that it is possible to define by rule every instance in which a mortgage is affordable to the borrower.  Nevertheless, the agencies recognize that some creditors might be inclined to originate all or predominantly Qualified Mortgages, particularly when the Ability to Repay rule first takes effect.”

This is great language, but as with almost all things legal, it comes with the type of twist that helps keep people hooked on attorneys and compliance officers.  In almost a throw-away line in the memo, the agencies state that they “believe” that the same principles apply to the Fair Housing Act, another federal law that outlaws housing discrimination more broadly than does the Equal Credit Opportunity Act.

Why the hesitation?  For one thing, the Supreme Court will be hearing a case later this term in which it will decide whether disparate impact analysis is even authorized under the Fair Housing Act.  In addition, the FHA has independent authority to interpret the Fair Housing Act and it, noticeably, did not sign off on this memo.  This is particularly important since the FHA has highlighted the continuing importance of disparate impact analysis by promulgating regulations on this issue earlier this year.  This raises the very real possibility that while one set of regulators will be sanctioning QM loans, another regulator will seek to discourage their use, at least when such practices have the impact of depressing home ownership for protected classes.

I’ll be blogging more about this in the future.  In the meantime, have a nice day.

Entry filed under: Compliance, Legal Watch, Regulatory. Tags: , , , .

Avoid Getting Carried Away When Even The Good News Is Bad

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Authored By:

Henry Meier, Esq., 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.

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