Discriminatory lending is a delicate issue, the legalities of which are complex, as the definition of ‘discriminatory’ is subjective and interpretations are wide-ranging.
Under a relatively new and controversial legal interpretation, the Obama administration has asserted that the federal Fair Housing Act, under the ‘disparate impact’ theory, prohibits not only intentional discrimination against minorities but also policies that have the ‘effect’ of discrimination, whether intentional or not.
The U.S. Department of Housing and Urban Development (HUD) earlier this year affirmed that borrowers can use the disparate impact theory to bring claims of housing discrimination under the Fair Housing Act. What's more, the Department of Justice has, in recent years, brought housing discrimination lawsuits citing disparate impact against large mortgage lenders including Bank of America and Wells Fargo. The banks have since settled those cases out of court. San Diego-based Plaza Home Mortgage recently settled a similar suit, but later said the Justice Department's case was flawed and unfair.
The disparate impact doctrine is also being challenged in the pending U.S. Supreme Court landmark case ‘Township of Mount Holly v. Mt. Holly Garden Citizens Action Inc.‘ At the center of the case is this basic question: Are lenders vulnerable to disparate impact accusations simply because they reject more minority applicants or quote them higher interest rates using risk-based statistical models in their underwriting? Mortgage industry leaders argue that the Fair Housing Act only applies to intentional discrimination.
However, a settlement may be coming soon in the Mount Holly case, according to reports, which would mean the Supreme Court would not have the opportunity to decide which interpretation is correct.
Interestingly, the Consumer Financial Protection Bureau's (CFPB) new ability-to-repay and qualified mortgage (ATR/QM) rules going into effect in January will result in what might be interpreted as ‘disparate impact,’ and thus could be considered at odds with the Administration's new interpretation of disparate impact as it applies to the Fair Housing Act, as well as the Equal Credit Opportunity Act (ECOA), which offers similar protections.
The new CFPB rules, which fall under the Dodd-Frank Act, will require lenders to ensure that borrowers have a debt-to-income ratio of no more than 43% when applying for a mortgage, in order for the loan to be considered a ‘qualified mortgage’ and thus eligible for certain protections. In addition, borrowers will have to meet other strict new standards imposed by lenders that in effect require them to prove their ‘ability to repay.’ These new rules are expected to make it harder for certain homebuyers – particularly those at the lower end of the income spectrum – to qualify for mortgages.
The conflict between the CFPB and Fair Housing Act/ECOA rules has been a major concern for lenders, who in recent months have reportedly been hounding federal regulators to get clarity on whether they will be at risk of Fair Housing violations once they implement the stricter lending standards required under the CFPB's new rules.
In response, five federal regulatory agencies – the CFPB, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Association – on Tuesday issued a joint statement to the effect that lenders will not face undue fair lending risks under ECOA once they implement the new ATR/QM rules.
In their joint statement, the agencies reiterated that the ‘ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction based on characteristics including race, religion, marital status, color, national origin, sex, and age,’ therefore denying someone a mortgage based purely on financial considerations does not constitute an act of discrimination.
Further, the five 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 agencies note the decisions creditors will make about product offerings in response to the ability-to-repay rule are similar to decisions creditors have made with regard to other significant regulatory changes affecting particular types of loans,’ the statement reads.
It goes on to recommend that creditors ‘continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring policies and practices and implementing effective compliance management systems.’
Should the Supreme Court rule in the Mount Holly case and issue a new interpretation of the disparate impact doctrine as it applies to the Fair Housing Act, the ruling would likely also apply to the ECOA, since both acts offer similar protections.
In a statement issued Wednesday, Pete Mills, senior vice president, residential policy and member services for the Mortgage Bankers Association (MBA), says the regulators' statement, ‘while a positive development’ has ‘significant limiting factors.’
‘First, HUD and the Department of Justice are not parties to the statement and are the agencies that have enforcement authority under the Fair Housing Act,’ Mills writes. ‘In that vein, MBA has filed an amicus brief with other trade associations in the Mount Holly case currently before the U.S. Supreme Court asking the court to rule that disparate impact claims cannot be brought under the Fair Housing Act.’
‘Additionally, the statement addresses only supervisory actions by the CFPB and the banking agencies, and does not directly address litigation claims that may be brought by private parties,’ Mills adds. ‘Finally, the statement, while encouraging, does point out that ‘[a]s with any other compliance matter, individual cases will be evaluated on their own merits.’
To read the full interagency statement, click here.
