Fair Lending Risk When Offering Qualified Mortgages

In January 2014, the ability-to-repay provision of the Dodd-Frank Act will take effect. Financial institutions will have the option to make loans that fit into certain categories considered “qualified mortgages” (QMs), which will maintain a presumption of compliance with the ability-to-repay rules.

QMs are generally less risky, have limited upfront points and fees, and have specialized underwriting requirements. While making only QMs ensures compliance with ability-to-repay rules, the industry has questioned if maintaining a policy of offering only QM loans could have a disparate impact (a policy or practice that inadvertently discriminates or negatively impacts a protected class as defined in the Equal Credit Opportunity Act) on groups protected under fair lending laws.

In response, the regulatory agencies released in a statement, “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.” While the comments from the agencies suggest that a QM-only policy would not automatically result in a disparate impact claim, they fell short of explicitly stating this or offering a safe harbor. Therefore, financial institutions should be able to provide evidence that their policy and practices, in response to ability-to-repay rules, have a legitimate business necessity that cannot reasonably be achieved by means that are less discriminatory in their impact.

To discuss how PYA can assist your institution with implementing the ability-to-repay rules or monitoring fair lending compliance, contact the expert listed below at (800) 270-9629.

Recommended Links:

Learn more about PYA’s Financial Institutions Advisory Services and Financial Institutions Audit & Accounting Services

 

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Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

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