Community Bankers of Iowa Monthly Banker Update July 2014 | Seite 11

Ability to Repay and Qualified Mortgage Risks: Part 3 of 3
Written By: Jeff Andersen - Attorney; Dickinson, Mackaman, Tyler & Hagen
Part 1 of this
series discussed
the ability-to-repay
rule generally,
including an
outline of the five general categories of loans under the
rule. Part 2 discussed the litigation risks inherent in the rule
and the differences between safe harbor protection and
a rebuttable presumption. In this part, we will discuss fair
lending risk and secondary market considerations.
Fair Lending Risk
Banks that have decided to make only qualified mortgages
or to otherwise reduce the mortgage products they offer
will have to consider the potential fair lending risk. Such
decisions could have an adverse impact on protected
classes and trigger a disparate impact issue under
the Fair Housing Act and the Equal Credit Opportunity
Act. A disparate impact challenge can be initiated by a
governmental agency or a private party based only on
statistics showing an adverse impact on a protected class –
no intentional or overt discrimination needs to be proved. If
there is evidence of a disparate impact, the burden shifts to
the bank to show: 1) that the lending policy is neutral; 2) to
provide a business justification for the policy; and 3) to prove
that the asserted business justification could not be met by
any means that would have a less discriminatory effect.
A good example of a disparate impact action is the 2012
Department of Justice settlement with Luther Burbank
Savings Bank. The bank had a $400,000 minimum principal
amount written into their loan policy. This policy is clearly not
overtly discriminatory – it applies to all borrowers regardless
of race, sex, religion, or other factors. The DOJ, however,
found that the policy had a disparate impact on minority
borrowers and that the bank failed to justify the business
need for the policy.
There are numerous potential business justifications for
a policy to make only qualified mortgages or to restrict
mortgage offerings. Justifications could include the cost
of complying with two underwriting criteria, the profitability
(or lack thereof) of making ability-to-repay loans, the
marketability of ability-to-repay loans in the secondary
market, and the additional risk inherent in getting only a
rebuttable presumption of compliance as opposed to a
safe harbor. It is not clear, however, how such business
justifications will be considered by regulators in pursuing
disparate impact investigations.
The federal regulators issued a release in October 2013
that sought to calm industry fears of fair lending risk.
In the release, regulators state: “[t]he 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.” [emphasis added]. Although
this release provides some comfort, it contains enough
qualifiers that banks should tread lightly and still consider
fair lending in any decisions made. Fair lending is pervasive
and should be a consideration in all major product decisions.
Moreover, the consideration of fair lending should be welldocumented.
Secondary Market Considerations
Another risk involved with the ability-to-repay rule is the
relative unknown of how the secondary market will react
to the rule. Banks that sell to Fannie and Freddie have
some indication in the short-term, as they have adopted
the CFPB’s points and fees threshold and certain product
restrictions. Substantial uncertainty remains, however, as
to when or if Fannie and Freddie will adopt a definition of
qualified mortgages. Perhaps more importantly, there is
uncertainty as to the future of Fannie and Freddie – th