The joint statement from the five banking and credit union regulators addressed a significant industry concern. Lenders have been worried that they could be cited for discrimination, even if it's unintentional, if they only seek to provide QM loans, noting that many minorities would not qualify for that status according to recently released statistics.
But in their statement, the agencies stated that the QM rule and the fair lending law known as the Equal Credit Opportunity Act are "compatible."
Both regulations "promote creditors acting on the basis of their legitimate business needs," the regulators said. "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 regulators indicated creditors should not become overly concerned with a single element of the QM definition, including a debt-to-income requirement, saying that there are several other factors that need to be taken into account to make a "reasonable, good faith determination" that the borrower has the ability to repay a loan.
Still, regulators did not go so far as promise that banks are completely protected from any fair lending violations when making QM loans.
"They certainly did not provide a safe harbor to lenders against fair lending violations," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr.
He noted that there are other potential fair lending issues under incoming mortgage rules, such as the points-and-fees structures, where lenders will need to make sure they are not charging more to one protected class over another; or denying one group of borrowers over another.
"The guidance disappointingly doesn't address application rejections. If rejected applications have a disparate impact on a protected class, I'm worried about how the agencies will react to that," Kaplinsky said. "That being said, I don't think that they will go after somebody on fair lending grounds just because the lender is not making non-qualified mortgages."
Many lenders have said they will not make non-QM loans, however, because it is easier for consumers to make allegations in court that the originator did not properly assess their ability to repay the loan. Regulators acknowledged it was an issue.
"The bureau does not believe that it is possible to define by rule every instance in which a mortgage is affordable for the borrower. Nonetheless, the agencies recognize that some creditors might be inclined to originate all or predominantly qualified mortgages, particularly when the ability-to-repay rule first takes effect," stated the regulators. "The rule includes transition mechanisms that encourage preservation of access to credit during this transition period."
The regulators further said that the rules are no different from the past when creditors built or changed products to comply with new laws. However, they acknowledged that heightened regulations will force some creditors to alter what they offer.
"As creditors assess their business models, the agencies understand that implementation of the ability-to-repay rule, other Dodd-Frank Act regulations, and other changes in economic and mortgage market conditions have real world impacts and that creditors may have a legitimate business need to fine-tune their product offerings over the next few years in response," the regulators said. "Creditors should continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems. As with any other compliance matter, individual cases will be evaluated on their own merits."
Jo Ann Barefoot, co-chair of Treliant Risk Advisors, agreed that the statement was no "safe harbor" but "it's clearly helpful."
"Having this guidance in writing is stronger than just hearing the regulators say it," she said.
The statement was issued by the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency and the National Credit Union Administration.