We recently wrote about the soon to be released (maybe) final rule defining Qualified Mortgages (QM) by the Consumer Financial Protection Bureau (CFPB). The definition of a qualified mortgage is important, because it is one way banks can comply with Title XIV of Dodd-Frank, which says no creditor may make a mortgage loan without making a reasonable and good faith determination that the borrower has the ability to repay. By following the Qualified Mortgage (QM) rule, a creditor will be presumed to have complied with the general ability to repay standard.
Qualified Mortgages, presumably, will be those that fit the cookie-cutter definition forthcoming from the CFPB. We anticipate banks will prefer originating QMs because compliance with the ability to repay standard will be presumed, which will help keep the banks’ operating costs down. Envision a world where most mortgages fit a single definition. Whether the proponents of Dodd-Frank planned it this way or not, this is how it will go down.
Now, put that vision aside and remember the articles we wrote a few months ago about the rash of disparate impact in lending claims being pursued by the Department of Justice, where we questioned Justice’s secrecy and bullying tactics:
“Disparate impact” is the key phrase — an alleged disparate impact is the statistical summary prosecutors point to to say banks must have behaved in a discriminatory manner because Group A received fewer loans or less favorable loan terms than Group B.
Once a disparate impact claim has been borne out by the Justice Department’s statistical sifting, banks must show how the differences between Group A’s loans and Group B’s loans were justified by business necessity. The bottom line is that comparing apples to oranges will never result in a reasonable assessment of fairness.
So, in the near future, if banks decide it makes the most business sense to stick to the CFPB’s QM definition and primarily originate QMs, what will come of the Justice Department’s statistical sifting? Will Justice change its definition of disparate impact, or the unpublished manner in which it arrives at such a conclusion? Or will banks who stick to originating Qualified Mortgages be putting themselves at risk from a disparate impact / fair lending perspective?
We certainly hope that Justice Department and CFPB officials will see the potential damage that is about to be realized by the lending industry, and as an end result, consumers in the form of stricter loan options. Otherwise, lenders may be facing a classic case of “damned if you do, damned if you don’t.”
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