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.
Learn more about PYA’s Financial Institutions Advisory Services and Financial Institutions Audit & Accounting Services
WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.