Five federal regulators, with HUD noticeably absent, issued the first interagency guidance on the much-debated intersection of fair lending enforcement and the Ability-to-Repay and Qualified Mortgage Standards Rule taking effect in January 2014. In an Interagency Statement issued on October 22, 2013, the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and the National Credit Union Administration responded to industry concerns about whether the decision to offer only “Qualified Mortgages” (QMs) will put lenders at risk for fair lending claims. The agencies advised 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” under the Equal Credit Opportunity Act (ECOA). They stopped short of providing any definitive guidance, let alone making any guarantees. Generally, the Interagency Statement provides some limited comfort for lenders who plan to issue QMs, but the guidance is incomplete.

THE REGULATORY BACKDROP -

The Dodd-Frank Act charged the Consumer Financial Protection Bureau (CFPB) with rewriting mortgage lending rules, including the creation of a new Ability-to-Repay Rule. The Rule generally requires lenders to make a reasonable, good-faith determination that a consumer has the ability to repay a mortgage loan before extending the loan. And it creates a presumption of compliance for certain QMs, which may have a debt-to-income ratio limit of no greater than 43% and are subject to various restrictions on loan features perceived as more risky, like interest-only terms, prepayment fees, extended amortization, “points and fees” in excess of 3% and balloon payments. In the CFPB’s words, the Rule “provides a shield against litigation by borrowers who default or mortgage-backed securities holders if loans hit some elevated requirements.”