United States: Interagency Fair Lending Guidance: A First Step, But In The Right Direction?

Five federal regulators, with HUD noticeably absent, issued the first interagency guidance on the much-debated intersection of fair lending enforcement and the Ability-to-Repay and Qualified Mortgage Standards Rule taking effect in January 2014. In an Interagency Statement issued on October 22, 2013, the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and the National Credit Union Administration responded to industry concerns about whether the decision to offer only "Qualified Mortgages" (QMs) will put lenders at risk for fair lending claims. The agencies advised that they "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" under the Equal Credit Opportunity Act (ECOA). They stopped short of providing any definitive guidance, let alone making any guarantees. Generally, the Interagency Statement provides some limited comfort for lenders who plan to issue QMs, but the guidance is incomplete.

THE REGULATORY BACKDROP

The Dodd-Frank Act charged the Consumer Financial Protection Bureau (CFPB) with rewriting mortgage lending rules, including the creation of a new Ability-to-Repay Rule. The Rule generally requires lenders to make a reasonable, good-faith determination that a consumer has the ability to repay a mortgage loan before extending the loan.1 And it creates a presumption of compliance for certain QMs, which may have a debt-to-income ratio limit of no greater than 43% and are subject to various restrictions on loan features perceived as more risky, like interest-only terms, prepayment fees, extended amortization, "points and fees" in excess of 3% and balloon payments. In the CFPB's words, the Rule "provides a shield against litigation by borrowers who default or mortgage-backed securities holders if loans hit some elevated requirements."2

The strictures surrounding QMs are reminiscent of former Congressman Frank's "plain vanilla" mortgage rule, surfaced in the early stages of the Dodd-Frank Act debate. There are widespread concerns that choosing to offer only relatively low-priced mortgage loans with "standard" terms will result in low to moderate income borrowers being shut out of the mortgage market. To the extent this results in a disproportionate negative impact on product choice for minority (non-white) borrowers, fair lending risks arise.

Regulators broadly interpret ECOA and the Fair Housing Act (FHA) to apply to any lending policy that has an adverse impact on a protected class of borrowers, regardless of any discriminatory intent by the lender. The CFPB interprets ECOA to prohibit any "practice that . . . has a disproportionately negative impact on a prohibited basis . . . unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact."3 And the Department of Housing and Urban Development (HUD) recently issued an aggressive disparate impact rule that requires a defendant to show that "the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests" and that the defendant could meet that interest with some other, theoretical practice "that has a less discriminatory effect."4 The CFPB, HUD, OCC and other regulators have been consciously and vocally ramping up fair lending enforcement even as the CFPB has been working on tightening lending requirements.5

AGENCY RESPONSE

The Interagency Statement responds that they "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 took care to add, though, that "[i]ndividual cases will be evaluated on their own merits," and "[c]reditors 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."

In the Statement, the agencies liken the current situation to that in 2008, when many creditors decided to stop offering higher-priced mortgage loans after the adoption of various rules regulating those loans. They added, "We are unaware of any ECOA or Regulation B challenges to those decisions."

OPEN ISSUES

The Interagency Statement responds only to the very first part of the industry's wider concerns about fair lending enforcement after the Ability-to-Repay Rule takes effect in 2014. The Statement implies that the decision to issue only QMs may constitute a "legitimate business need" under the ECOA, but stops short of saying so. Instead, it states vaguely that "creditors may have a legitimate business need to fine-tune their product offerings over the next few years in response" to the Ability-to-Pay Rule and other Dodd-Frank Act regulations. This might provide some comfort that, at least for now, a decision to offer only QMs in 2014 is arguably in response to a legitimate business need. But in any event, even a legitimate business need can be overridden by an agency determination that the need can "reasonably be achieved as well" by some other practice that the agency decides that it prefers.

More broadly, the Interagency Statement is limited to "guidance" about "some general principles that will guide supervisory and enforcement activities." That may be helpful for working with the agencies at the next exam, and it may even be persuasive to a court considering a fair lending challenge. But it does not limit the ability of private plaintiffs or other regulators like HUD to bring claims under the FHA or any other state or federal statute, or even do anything to bind the issuing agencies. The agencies could have issued official staff commentary stating that, in their view, the decision to issue only QMs consistent with the Ability-to-Pay Rule is in response to a legitimate business need and will not in and of itself subject a lender to liability under the ECOA, but they chose not to do that.

Even assuming the agencies mean to say that they "anticipate" abstaining from bringing fair lending claims on the basis of a creditor's decision to issue only QMs, that is of limited comfort because that is not how disparate impact fair lending claims are commonly initiated. In practice, with the popularity of disparate impact, government agencies or private plaintiffs point to rough data that appear to show that a protected class of borrowers, on average, has statistically significant adverse outcomes. Then, particular practices are attacked. The alleged "practice," for example, may be a grant of impermissible "discretion" to loan originators. Under the disparate impact burden-shifting analysis, defendants must prove that the identified practice is "necessary" to achieve a legitimate interest, while the existence of an alternative that merely "serves" the interest in a less discriminatory way may result in liability for discrimination. This lack of symmetry increases the risk of second-guessing and 20-20 hindsight in disparate impact cases.

A real issue, then, is whether a lender's decision to issue QMs could impact its fair lending data by, among other things, increasing denial rates for protected classes of borrowers who are on average statistically less likely to meet the QM requirements. The lender would then be obligated to prove that the disparity is due to its policy of not making loans other than QMs and not, for example, because of an overly broad grant of discretion to its loan officers or the alleged failure to adequately serve minority communities through its advertising or branch locations. The Interagency Statement seems to leave open this possibility, noting that "other factors" may still "elevate a supervised institution's fair lending risk."

Moreover, the guidance, such as it is, is limited to the ECOA. Fair lending enforcement and litigation takes many forms, including under the FHA and state and federal UDAP / UDAAP laws. HUD did not join the Interagency Statement, and has issued its own aggressive interpretation of the disparate impact doctrine under the FHA.6 In the Interagency Statement, the agencies advised that they "believe the same principles described [in the Statement] apply in supervising institutions for compliance with the . . . FHA," but again, that is not binding on any court or on HUD.

CONCLUSION

Any guidance on the implementation of the Ability-to-Repay Rule and fair lending enforcement is welcome. But, fair lending enforcement and litigation may still pose serious concerns even for lenders issuing only QMs. The lesson from the Interagency Statement may be that lenders electing to make only QM loans should continue to carefully evaluate and monitor fair lending risk, through HMDA data analysis and other prudent measures within a robust compliance management system.

Footnotes

1 For more detail, see our client alerts on the Ability-To-Repay Rule here and here.

2 CFPB Press Release, "Federal Regulators Provide Guidance on Qualified Mortgage Fair Lending Risks" (Oct. 22, 2013), available here.

3 12 C.F.R. pt. 1002, Supp. I, § 1002.6, ¶ 6(a)-2.

4 24 C.F.R. 100, available on the HUD website.

5 See, for example, CFPB Bulletin 2012-04 and our client alerts on CFPB enforcement actions regarding HMDA violations and indirect auto lending, the new HUD disparate impact rule, and recent disparate impact litigation in the Supreme Court.

6 For more information, please our client alert here.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Angela Kleine
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions