Legal liability caused by a dilemma between the Consumer Financial Protection Bureau’s proposed ability-to-repay rule and U.S. Department of Housing and Urban Development fair lending statutes, could force community banks to leave mortgage lending.
In April, in a controversial move, the Bureau announced it will pursue lenders whose practices have a disparate impact on consumers. “We cannot afford to tolerate practices, intentional or not, that unlawfully price out or cut off segments of the population from the credit markets,” CFPB Director Richard Cordray said at the time.
However, for the CFPB, not all disparate impact is taboo. By the end of January, the Bureau is required by the Dodd Frank Act to finalize the ability-to-repay rule which defines how a banker determines a borrower’s ability to repay a mortgage loan. In so doing, the CFPB will create two disparately treated groups of consumers: those who do not receive funding because they cannot repay and those who receive funding because they can repay.
But a problem arises. The Fair Housing Act gave HUD the authority to make rules which regulate discrimination in mortgage lending. As with the CFPB, HUD’s proposed Fair Housing rule treats disparate impact caused by lending practices as discrimination.
HUD’s rule also allows borrowers to sue lenders for disparate impact. Again, as with the CFPB, no actual intent to discriminate is needed as long as disparate impact can be shown. The problem arises because there is no safe-harbor for ability-to-repay-lending-practices that also cause disparate impact. As a result, unless the CFPB and HUD collaborate to create a safe-harbor for disparate impact caused by the inability-to-repay rule, banks will find themselves in a regulatory catch-22.
Without a safe harbor, banks will be threatened, on the one hand, with hefty fines if they make a loan and it’s deemed the borrower did not have the ability to repay. But, on the other hand, they will face legal liability via HUD’s rule. Why? Because current law does not preclude borrowers from suing for discrimination under HUD’s proposed rule for disparate impact caused by ability-to-repay-lending-practices.
It’s not hard to foresee an exodus of small banks from mortgage lending if this catch-22 is not resolved. Without a safe-harbor, banks might begin to wonder if it is all worth the risk.