Will New Mortgage Regulations Violate Fair Lending Laws?

The Consumer Financial Protection Bureau (CFPB), the Federal Reserve and other federal agencies regulating banks responded to mortgage lender concerns over legislation set to become effective in January.Mortgage lenders will be required to verify that mortgage borrowers have the ability to make their mortgage payments.

Some mortgage lenders have responded to new lending requirements by indicating that they will make only "basic " home loans to well-qualified borrowers who carry little debt. Concerns arose that this type of lending policy could be a violation of U.S. fair lending laws.

According to Reuters, the regulators' statement said in part, "The agencies 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 CFPB has previously stated that lenders would receive "some protection" against lawsuits arising from the "ability to repay" rule.

Verifying Ability to Repay Could Shut Disadvantaged Borrowers Out

According to FDIC regulations, disparate impact can occur "When a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a 'disparate impact.'" The Fair Housing Act prohibits discrimination based on:

  • Race
  • Religion
  • National origin
  • Gender
  • Marital status
  • Age (provided applicant has the ability to contract)
  • Familial status (defined as children under the age of 18 living with a parent or legal custodian, pregnant women, and people securing custody of children under the age of 18)
  • Disability

Mortgage lenders have expressed concerns about the disparate impact provision of federal fair lending laws as it may be applied to a policy of making only qualified mortgage loans. The disparate impact provision states that lenders cannot be found in violation of federal lending laws due to disparate impact alone; the law allows for lenders to implement policies and procedures it deems as "business necessities."

FDIC regulations state that a business necessity must be obvious and straightforward rather than speculative or hypothetical. They cite cost versus profitability as examples of potentially legitimate justifications for policies and procedures that inadvertently result in disparate impact. This appears to provide justification for mortgage lenders choosing to make only qualified mortgages to minimize their costs and lower their risks.

Differences in theory (that a lender's decision to make only qualifying mortgage loans won't lead to violations of fair lending laws) and practice (actually making only qualifying mortgages and arguing with federal examiners that such a policy doesn't cause a disparate impact on protected classes of mortgage applicants) can be characterized as an experiment; There is a hypothesis, but we won't know the actual outcome until a few mortgage lenders limit their lending to qualified mortgages and federal examiners perform compliance examinations on those lenders.

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