Recognizing that many creditors will be inclined to originate only “qualified mortgages” (“QM loans”) when the CFPB’s ability-to-repay rule takes effect in January, five federal regulators yesterday announced that a creditor’s decision to offer only QM loans will not elevate the creditor’s fair lending risk, absent other factors.
As discussed in previous alerts, the CFPB’s ability-to-repay rule creates an overwhelming incentive for creditors to originate QM loans. That is because creditors that originate QM loans will be deemed (or presumed) to comply with the Dodd-Frank Act requirement that creditors must verify a consumer’s ability to repay a residential mortgage loan before extending credit. Among other requirements, QM loans must be free of certain risky product features (e.g., negative amortization and interest only payments), include a 3% limit on points and fees, and conform to specified underwriting requirements. These heightened standards make it harder for consumers with less-than-stellar credit to qualify for QM loans. Lenders have been worried that offering only QM loans could result in a greater percentage of minority applicants being denied loans than white applicants, potentially exposing lenders to disparate impact claims. Recognizing this dilemma, creditors have been asking regulators for months whether making only QM loans would open them up to disparate impact challenges.
Yesterday, the Federal Reserve Board, the CFPB, the FDIC, the NCUA, and the OCC (the “Federal Agencies”) addressed this conundrum by issuing an Interagency Statement on Fair Lending and the Ability-to-Repay and Qualified Mortgage Standards Rule. In this Interagency Statement, the Federal Agencies recognize that a creditor offering only QM loans may do so to meet a legitimate business need. The Federal Agencies recall how many creditors ceased offering “higher-priced mortgage loans” following a July 2008 rulemaking. This business decision that many creditors made was apparently borne of regulatory and market drivers and did not, itself, lead to ECOA/Regulation B challenges. Using history as a guidepost, the Interagency Statement suggests that creditors offering only QM loans would not run afoul of ECOA and Regulation B’s disparate impact prohibition, absent other factors.
The Interagency Statement also notes that the same principles apply in determining compliance with the Fair Housing Act and its implementing regulation. The OCC, the Federal Reserve Board, the FDIC, and the NCUA supervise institutions for compliance with the Fair Housing Act. (The Department of Housing and Urban Development and the Department of Justice also have Fair Housing Act authority, but are not parties to this guidance.)
Notwithstanding the assurances in the Interagency Statement, the Federal Agencies caution that “creditors should 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.” Thus, while the Interagency Statement may alleviate concerns regarding fair lending enforcement in the QM space, lenders should continue to make fair lending monitoring a priority.