A New Year's Resolution

By Fulmer, Ann | Mortgage Banking, January 2013 | Go to article overview

A New Year's Resolution


Fulmer, Ann, Mortgage Banking


WE HAVE SEEN THE LIGHT AT THE END OF THE TUNNEL and can report that it is, in fact, a train. A majority of the electorate decided it was happy with the balance of power in Washington. That means anyone in the financial services industry who was dreaming of a Congress and an administration that would significantly scale back--or outright repeal--the Dodd-Frank Wall Street Reform and Consumer Protection Act will have to adjust their expectations.

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The Dodd-Frank train is pulling with it a slew of important final regulations that will become law toward the end of January. While it will be something of a relief to have a bit more certainty in the residential mortgage lending space, the vast majority of banking professionals I'm acquainted with are losing a lot of sleep because of the enormous challenges that implementation and ongoing compliance pose to the industry.

Those jobs are complicated by a pronounced lack of details and guidance in some areas--vendor management is one that immediately springs to mind--as well as the challenges posed by the inherent inconsistencies that Dodd-Frank contains.

A prominent example concerns the Qualified Residential Mortgage (QRM) requirements. Governing how big a slice of risk lenders must retain when mortgages are securitized, QRM attempts to reduce risk by requiring very high origination standards. Bankers and consumer groups--in a well-publicized if rare meeting of the minds--have been very vocal about the negative impact QRM standards will have on low-income, minority and underserved groups if the 20 percent down payment and combined loan-to-value (LTV) ratio standards currently proposed are maintained.

What has not been publicly acknowledged is an even starker reality: If lenders comply with QRM origination standards, they will most likely be in violation of the "disparate impact" analysis that will be applied by the Department of Housing and Urban Development (HUD), Consumer Financial Protection Bureau (CFPB) and other regulators when they assess compliance with the Equal Credit Opportunity Act (ECOA) and Regulation B, and the Fair Housing Act.

Under the disparate impact theory, lenders can be held liable for discriminatory lending practices if statistical analysis shows that protected groups are affected differently than non-protected groups--even where those guidelines and programs are facially neutral. Because low-income borrowers and single female heads of household are more likely to have difficulty accumulating the down payments required under QRM as presently constituted, originating to proposed QRM standards will inevitably lead to disparate impacts that violate fair lending laws.

How will this affect lenders' decision-making about what programs to offer and to whom? Which will they choose--the rock or the hard place? …

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