United States: Atr/Qm And Fair Lending

For approximately two years now we have devoted much time and discussion to the subject of the Ability To Repay Rule and the Qualified Mortgage Rule which go into effect January 10, 2014. We have analyzed closely the risks involved in complying and the various alternatives available, particularly alternatives for originating Qualified Mortgages.

Often the subject of Fair Lending has come up. Many of you have questioned whether a policy that says your bank will only originate Qualified Mortgages could later be criticized by examiners on a Fair Lending basis if certain customers are turned down for credit because they cannot meet the underwriting requirements for a Qualified Mortgage. The question is whether your "only Qualified Mortgages" policy results in what the regulators and the Equal Credit Opportunity Act refer to as "disparate impact." You will remember that disparate impact occurs where you have a facially neutral policy ("Qualified Mortgages Only") that has a disproportionately negative impact on a protected class and you fail to show a legitimate business need that could not be accomplished by some other less discriminatory means.

On October 22, 2013, each of the federal bank regulatory agencies and the CFPB issued an Interagency Statement on Fair Lending Compliance and the Ability-To-Repay and Qualified Mortgage Standard Rules. The purpose of that statement was to describe some general principles that would guide supervisory and enforcement activities by these different agencies.

The agencies declared the Ability-To-Repay Rule and the Equal Credit Opportunity Act compatible since they both promote actions by lenders that are based on legitimate business needs. Their basic conclusion is that a lender's decision to originate only Qualified Mortgages should not elevate the institution's Fair Lending risk "absent any other factors."

So, a policy requiring that all dwelling-secured loans meet the definition of a Qualified Mortgage should not, on its face alone, be criticized as discriminatory. But what about the situation we have questioned where a lender sets a lower debt-to-income ratio than the Qualified Mortgage definition would allow (say, 37% debt-to-income versus 43% debt-to-income that the Qualified Mortgage rule would allow)? Applicants with a 40% debt-to-income ratio would be declined even though their loan would have been a Qualified Mortgage. If a larger proportion of applicants in protected classes (e.g., female and minority applicants) fall into that 38% to 43% category, does your policy discriminate

with no business necessity involved? We think this could be an example of one of those "other factors" the regulations mention.

This example points up the real concern. Applicants in protected classes will fail to meet the ATR and/or QM requirements on a disproportionate basis. Recent analysis of HMDA data by the Federal Reserve Board confirms this. The CFPB seemed to implicitly recognize this when it stressed that community banks could often originate loans to applicants that would not meet the Qualified Mortgage requirements. It was more or less silent on the issue of satisfying the Ability To Repay Rule since that basic requirement has to be met. And it led the CFPB to exempt Community Development Financial Institutions (smaller banks that provide services in low income or economically distressed areas) altogether from the coverage from the Ability To Repay and Qualified Mortgage rules. The thought seems to be that these banks will have more of those customers who could not meet Ability To Repay or Qualified Mortgage standards, but that could still be reliable loan customers. The statement itself references "transition mechanisms that encourage preservation of access to credit" during the transition period when these rules first go into effect.

The regulators concluded that, with respect to any Fair Lending risks, the situation is not substantially different than what creditors have historically faced. They end with the admonition that you continue to evaluate Fair Lending risks as you have in the past by carefully monitoring your policies and practices and implementing an effective compliance management system. Then the catch: Individual cases will be evaluated on their own merits.

Not much meat in this Statement, but at least examiners have been told not to criticize a bank that chooses to only originate Qualified Mortgages. Now, the real question becomes will any bank be able to adopt such a policy?

AM=HD

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