Five federal agencies issued a statement Tuesday assuring creditors that they do not run the risk of being found in violation of fair lending laws should they choose to only originate “qualified mortgages” (QM) as defined earlier in the year.
The Consumer Financial Protection Bureau (CFPB), one of the five issuers of Tuesday’s release, handed down in January a number of guidelines for lenders to follow in order for their loans to be classified as QM (and thus “safe” should legal action arise). A major provision of those guidelines is the Ability-to-Repay (ATR) rule, which requires creditors “to make a reasonable, good faith determination that a consumer has the ability to repay a mortgage loan before extending the consumer credit.”
In response to CFPB’s rulemaking, some bankers have indicated they might limit their offerings to only QM products as the transition is made—and many are concerned as a result that their operations may run counter to the guidelines outlined in the Equal Credit and Opportunity Act (ECOA), implemented by the Federal Reserve’s Regulation B.
However, those fears are unfounded, regulators say.
“In the agencies’ view, the requirements of the Ability-to-Repay rule and ECOA are compatible. ECOA and
Regulation B promote creditors acting on the basis of their legitimate business needs,” the interagency release reads. “Viewed in this context, and for the reasons described below, the agencies do not anticipate that a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.”
The agencies also note “there are several ways to satisfy the Ability-to-Repay rule, including making responsibly underwritten loans that are not Qualified Mortgages,” saying they “do not believe that it is possible to define by rule every instance in which a mortgage is affordable for the borrower.”
With creditors having to consider a balance of secondary market opportunities, capital requirements, and credit and liability risk, regulators say they expect there will be a need for most businesses to fine-tune their products in response—something they should be used to, given the industry’s radical changes over the last few years.
“Some creditors, for example, decided not to offer ‘higher-priced mortgage loans’ after July 2008, following the adoption of various rules regulating these loans or previously decided not to offer loans subject to the Home Ownership and Equity Protection Act after regulations to implement that statute were first adopted in 1995,” the release says. “We are unaware of any ECOA of Regulation B challenges to those decisions.”
In making the transition in 2014, the agencies say creditors should carefully monitor their own policies and practices and implement effective compliance management systems the way they would do for other product selections.
“As with any other compliance matter,” they say, “individual cases will be evaluated on their own merits.”