On October 22, the CFPB, the OCC, the FDIC, the Federal Reserve Board, and the NCUA (collectively, the Agencies) issued a joint statement (Interagency Statement) in response to inquiries from creditors concerning their liability under the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B by originating only “qualified mortgages.” Qualified mortgages are defined under the CFPB’s January 2013 Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). The DOJ and HUD did not participate in the Interagency Statement.
The Interagency Statement describes some general principles that will guide the Agencies’ supervisory and enforcement activities with respect to entities within their jurisdiction as the ATR/QM Rule takes effect in January 2014. The Interagency Statement does not state that a creditor’s choice to limit its offerings to qualified mortgage loans or qualified mortgage “safe harbor” loans would comply with ECOA; rather, the Agencies state that they “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.” Furthermore, the Interagency Statement will not necessarily preclude civil actions.
The Agencies acknowledge that although there are several ways to satisfy the ATR/QM Rule, some creditors may be inclined to originate all or predominantly qualified mortgages, particularly when the ATR/QM Rule first becomes effective. In selecting business models and product offerings, the Agencies “expect that creditors would consider and balance demonstrable factors that may include credit risk, secondary market opportunities, capital requirements, and liability risk.” The Agencies further understand that creditors may have a “legitimate business need” to fine-tune their product offerings over the next few years in response to the impact of the ATR/QM Rule, just as they have in response to other significant regulatory changes that have occurred in the past.
The Agencies advise creditors to 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. Nonetheless, the Agencies state that individual cases will be evaluated on their own merits.
The Agencies state that they “believe that the same principles…apply in supervising institutions for compliance with the Fair Housing Act.” However, because neither DOJ nor HUD participated in issuing the Interagency Statement, it remains to be seen how those agencies would view this issue.
It is noteworthy that the standard articulated in the Interagency Statement (“legitimate business needs”) differs from HUD’s disparate impact rule relating to the Fair Housing Act. In its rule, HUD codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the rule states that the defendant would have the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent…or defendant…A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” (Emphasis added.)