Agencies Address Fair Lending Concerns of Industry and Indicate that ECOA, Ability-to-Repay Rule Compatible
In an October 22, 2013 statement released by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the National Credit Union Administration (collectively, “the Agencies”), the Agencies addressed the impact of the new Ability-to-Repay Rule, which takes effect in January 2014, on the Equal Credit Opportunity Act (ECOA). Specifically, the Agencies provided guidance regarding whether creditors would be liable under the disparate impact doctrine of ECOA (one of the methods of proving lender discrimination) if the creditors chose to only originate Qualified Mortgages (QMs) under the Ability-to-Repay Rule. As you might suspect, the Agencies indicated that the requirements of the Ability-to-Repay Rule and ECOA are compatible.
As part of implementing certain provisions of the Dodd-Frank Act, the Ability-to-Repay Rule creates minimum standards for mortgage loan transactions that require the lender to verify and document a potential consumer’s “reasonable ability to repay” before extending that consumer credit as part of a residential mortgage transaction. The Rule provides a safe harbor for QMs that meet specific requirements regarding risky features, limitations on upfront points and fees, and specialized underwriting requirements. These QMs are presumed to meet the Ability-to-Repay Rule criteria. Because of the potential liability for creditors that do not properly implement the Ability-to-Repay Rule, the industry anticipates that a number of creditors will decide to offer only QMs to consumers once the Ability-to-Repay Rule is implemented in order to ensure compliance and avoid liability.
In addressing the impact the Ability-to-Repay rule may have on ECOA, the Agencies noted that ECOA and its implementing regulation, Regulation B (12 C.F.R. Part 1002), encourage creditors to act on the basis of their legitimate business needs. The Agencies recognized that creditors may choose to originate all QMs once the Ability-to-Repay Rule is implemented based on an analysis of the creditor’s credit risk, secondary market opportunities, capital requirements, liability risk, and changes in economic and mortgage market conditions. The Agencies compared this decision-making with decisions by creditors to restrict their mortgage lending to loans that are purchasable on the secondary market and to other, historical responses to regulatory and market changes in the industry. Based on this context, and with the understanding that creditors continue to evaluate fair lending risk as they would for other types of product selections, the Agencies stated that they did “not anticipate that a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.”