CFPB, HUD face disparate impact mortgage lending dilemma
Lenders wanting to know the exact definition of discriminatory lending will have to wait until the Consumer Financial Protection Bureau releases its final ability-to-repay rule under the Dodd-Frank Act next January.
While the ability-to-repay rule doesn't address discriminatory lending the way the U.S. Department of Housing and Urban Development does, the rule could have a disparate impact on groups that do not meet the ability-to-repay standards. And the question then becomes will those groups effected by not obtaining mortgages try to file lending discrimination claims under the Fair Housing Act? This is a concern for lawyers like Richard Andreano, a partner at Ballard Spahr, who follows mortgage regulations.
"The ability-to-pay rule says be very conservative (in lending to individuals)," Andreano said. "But disparate impact is telling me to make as many loans as possible."
To avoid ambiguity and unnecessary litigation, he hopes the agencies will coordinate their rules.
As it stands now, the ability-to-pay rule drafted by CFPB is somewhat conflicting when its put side-by-side with HUD's version of discriminatory lending, Andreano suggests.
In late 2011, HUD proposed a final Fair Housing rule that would essentially allow discriminatory lending cases if borrowers could show a "discriminatory effect" or that one group was disparately impacted by lending practices. In other words, no actual intent to discriminate is needed as long as the disparate impact of the lending can be shown by a group, according to documents filed in the Federal Register. The recording in the Federal Register says HUD proposed the final draft of the rule "to establish uniform standards for determining when a housing practice with a discriminatory effect violates the Fair Housing Act."
At the same time, the CFPB is working on a rule that could hit lenders hard if they issue a loan and it's later found the borrower did not have the ability to repay. The confusion comes in when trying to decipher how a lender determines ability to pay. And if a group disparately impacted by not meeting "ability-to-repay" standards is upset, can they then sue for discrimination under HUD's proposed rule or will the two agencies create a safe harbor protection and coordinate the two laws?
"You have here two rules, and the underlying intent is consumer protection," Mortgage Bankers Association CEO David Stevens said at a conference in Dallas last week. "But by not coordinating the rules you can actually harm consumers by creating constraints in lending that could become a concern."
A court case that was expected to define the scope of discriminatory lending fell through at the Supreme Court last year, and HUD is waiting to see if a similar case will be heard by the Supreme Court this year.
Will it be a lender's "discriminatory intent" that determines a case or will it be the "discriminatory effect or outcome" of how loans are issued that constitute discrimination? The latter would lead conservative lenders trying to follow CFPB guidelines into a tight spot if the rules are not coordinated, Andreano suggests.
He says HUD has seemingly slowed down its push to define the rule as it waits to see if the Supreme Court will define it for them. But the real question is whether the "ability-to-repay" rule from the CFPB will protect lenders from what could be perceived as disparate impact on certain groups of borrowers by stipulating in its rule that loan decisions are safe from discrimination allegations as long as they are based on ability-to-repay guidelines.
Andreano says if the rules are not coordinated, the ambiguity between discriminatory lending laws and ability-to-repay provisions will encourage overly cautious lending.
"These rules will determine whether people own or rent the home they live in," Andreano said. "Since housing is such a key part of the economy, these rules are going to determine in a large part whether homeownership is obtainable for Americans or not."