Strict QM compliance does not raise fair lending risk
Regulators ease fears over potential discrimination claims
Federal regulators addressed industry concerns over the impact the qualified mortgage rule may have on fair lending claims this week.
Prudential regulators advised the market Tuesday that they do not anticipate a creditor’s decision to offer only qualified mortgages as an incentive to increase their supervision or prompt fair lending probes, the Consumer Financial Protection Bureau assured in a report.
"Fair lending wise, this is good news in and of itself because simply deciding to make only qualified mortgages doesn’t elevate fair lending risk. But people will need to keep appraised of what is going on in the marketplace," explained Ballard Spahr partner Richard Andreano.
The CFPB's ability-to-repay rule requires creditors to make a reasonable, good faith determination that a borrower has the ability to repay their mortgage before extending credit to the consumer.
Lenders are presumed to have complied with the ability-to-repay rule if they issue qualified mortgages, satisfying requirements that prohibit or limit risky features.
The regulators encourage lenders to continuously stay on top of fair lending risks by carefully monitoring policies and practices and implementing effective compliance management systems.
Once the new regulations take place at the start of the new year, many institutions may be a bit apprehensive to venture outside qualified mortgages until they gain the confidence that there is a marketplace for this need, Andreano pointed out.
Qualified mortgages will use standardized products — Fannie Mae and Freddie Mac loans — both of which can meet underwriting standards easily.
However, once the wind down of both government-sponsored enterprises takes place, the market will have to decide if other similar entities will take their place or if those types of products will no longer exist. Either way, the lending trends will change again, consequently impacting lenders, the Ballard Spahr partner explained.
"If Fannie and Freddie products aren’t replaced by something similar, then QM will be a narrow area and people will have a different lending decision to make, which may be to lend outside of the QM rule once the GSEs are gone," Andreano said.
Another factor the lending environment will have to face with the implementation of QM will be denial rate trends.
For instance, if a protected class of members are denied a loan because they do not meet the QM rule and lenders can prove it was because of the standard, it will leave lingering questions for regulators to handle.
"We’re in for an interesting time period, so we’ll just have to wait and see what happens," Andreano concluded. "This announcement will be viewed as a positive even though it doesn’t address everything."