25 Oct Federal Regulatory Update
Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule
The Consumer Financial Protection Bureau (“Bureau”), the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“Board”), the Federal Deposit Insurance Corporation (“FDIC”), and the National Credit Union Administration (“NCUA”) (collectively the “Agencies”) issued a joint statement on October 22, 2013, in response to inquiries from lenders about whether they would be liable under the disparate impact doctrine of the Equal Credit Opportunity Act (“ECOA”) and its implementing Regulation, Regulation B, by originating only qualified mortgages (“QMs”) as defined under the Bureau’s Ability-to-Repay and Qualified Mortgage Standards Rule (“ATR Rule”), which implement provisions of the Truth-in-Lending Act (“TILA”).
In the Agencies’ view, the requirements of the ATR Rule and ECOA are compatible. ECOA and Regulation B promote lenders acting on the basis of legitimate business needs. Viewed in this context, and for the reasons described below, the Agencies do not anticipate that a lender’s decision to offer QMs would, absent other factors, increase a supervised institution’s fair lending risk.
The Bureau’s ATR Rule implements provisions of the Dodd-Frank Act that require lenders to make a reasonable, good faith determination that a borrower has the ability to repay a mortgage loan before extending the consumer credit. TILA and the ATR Rule create a presumption of compliance with the ability-to-repay requirements from certain QMs, which are subject to certain restrictions as to risky features, limitations on upfront points and fees, and specialized underwriting requirements. However, consistent with the statutory framework, there are several ways to satisfy the ATR Rule, including making responsibly underwritten loans that are QMs. The Bureau does not believe that it is possible to define by rule every instance in which a mortgage is affordable for the borrower. However, the Agencies recognize that some lenders may originate all or predominantly QMs, particularly when the ATR Rule first becomes effective. The ATR Rule includes transition mechanisms that encourage preservation of access to credit during this transition period.
In selecting models and product offerings, the Agencies expect that lenders would consider demonstrable factors that may include credit risk, secondary market opportunities, capital requirements, and liability risk. Neither the ATR Rule nor ECOA or TILA precisely set out how lenders should balance such factors. As lenders assess their business models, the Agencies understand that implementation of the ATR Rule, other Dodd-Frank Act regulations, and other changes in economic and mortgage market conditions have real world impacts and that lenders may have a legitimate business need to fine-tune their product offerings over the next few years in response.
The Agencies recognize that some lenders’ existing business models are such that all of the loans they originate will already satisfy the QM requirements. For instance, a lender that has decided to restrict its mortgage lending only to loans that can be purchased on the secondary market might find that in the current market its loans are QMs under the transition provision that gives QM status to most loans that are eligible for purchase, guarantee, or insurance by Fannie Mae, Freddie Mac, or certain federal agency programs.
With respect to any fair lending risk, the current situation is not substantially different from what lenders have historically faced in developing product offerings or responding to regulatory or market changes. The decisions lenders will make about their product offerings in response to the ATR Rule are similar to the decisions that lenders have made in the past with regard to other significant regulatory changes affecting particular types of loans. This includes whether to offer higher-priced mortgage loans after July 2008 after the adoption of rules regulating such loans or high-cost mortgage loans with the adoption of the Home Ownership and Equity Protection Act in 1995. The Agencies are unaware of any ECOA or Regulation B challenges to those decisions.
Lenders 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. As with any other compliance matter, individual cases will be evaluated on their own merits.
The OCC, the Board, the FDIC, and the NCUA believe that principles described above apply in supervising institutions for compliance with the Fair Housing Act and its implementing regulation.