- Qualified Mortgage Standard Rules and Fair Lending Compliance
- November 4, 2013 | Author: Craig N. Landrum
- Law Firm: Jones Walker LLP - Jackson Office
An Interagency Statement on Fair Lending Compliance and the Ability to Repay and Qualified Mortgage Standards Rule (the "Rule") was issued October 22, 2013, by the Consumer Financial Protection Board and the four prudential federal bank and credit union regulators in response to inquiries from creditors about whether a lender would be liable for fair lending violations under the disparate impact doctrine of the Equal Credit Opportunity Act ("ECOA") and its implementing regulation, Regulation B, by originating only Qualified Mortgages as defined under the Rule. The Rule imposes standards on borrowers such as a 43 percent debt-to-income ratio in order to qualify the mortgage as a Qualified Mortgage and, by limiting mortgage origination to Qualified Mortgages, lenders could exclude applicants who may otherwise qualify for mortgages. The viewpoint of the agencies is that ECOA and the Rule are compatible and a creditor's decision to offer only Qualified Mortgages would not elevate a supervised institution's fair lending risk, absent other factors.
The qualification, "absent other factors," leaves open a large fair lending risk. The demonstrable factors offered as examples are credit risk, secondary market opportunities, capital requirements, and liability risk—all facially neutral practices. Where a facially neutral practice results in a disproportionally negative impact on a protected class, a creditor is not liable if the practice meets a legitimate business need that cannot be reasonably achieved as well by means that are less disparate in their impact. Thus, a decision to make only Qualified Mortgages on the basis of demonstrable factors is a facially neutral practice. If such a decision is made, the creditor should continue to evaluate fair lending risk by carefully monitoring the policies and practices to determine that there is not a disparate impact on a protected class. Further, if a disparate impact is found, documentation that there is a legitimate business need that cannot be reasonably achieved by other means must be provided. For example, a bank deciding to offer only Qualified Mortgages through its mortgage department may offer residential loans through its private banking department on different terms, including higher debt to income limits. The Interagency Statement does not seem to address this situation, which could lead to disparate impact claims due to the fact that the private banking department continues to offer mortgage loans that do not meet the Qualified Mortgage standards. The decision could be found to adversely impact protected classes and the bank must demonstrate that its legitimate business need could not otherwise be met. That may be difficult to do, if other departments are making similar loans.
Thus, the decision to make only Qualified Mortgage loans in a mortgage department may not offer complete protection from the ECOA if the bank originates other mortgage loans in other areas of the bank.