Consumer Compliance Outlook: Second Issue 2021

News from Washington: Regulatory Updates

Federal Reserve Board issues its biennial report on debit card transactions. On May 7, 2021, the Board of Governors of the Federal Reserve System (Board) published its biennial report for 2019 on interchange fee revenue and costs related to debit card transactions, as required by the Dodd‒Frank Act. Highlights of the report include:

Consumer Financial Protection Bureau issues final rule to amend the General Qualified Mortgage (QM) definition and subsequently postpones its mandatory compliance date to October 1, 2022. On December 29, 2020, the Bureau published a final rule in the Federal Register to amend the definition of a General QM, which is one option creditors can use to satisfy Regulation Z’s ability-to-repay (ATR) requirement for closed-end, dwelling-secured, consumer loans. The amended General QM definition became effective on March 1, 2021, with a mandatory compliance date of July 1, 2021. On April 30, 2021, the Bureau published a notice in the Federal Register to extend it to October 1, 2022, as explained below.

The original General QM definition provided that a borrower’s debt-to-income ratio could not exceed 43 percent. The revised General QM eliminates this restriction and replaces it with priced-based thresholds tiered to the loan amount and lien position. The Bureau found that a loan’s price, measured by the spread between the loan’s annual percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction, provides an alternative measure of creditworthiness and can be a strong indicator of a borrower’s ability to repay the loan than DTI alone. The Bureau adopted this change to address the January 2021 scheduled expiration of the GSE Patch QM, which provides QM status to mortgage loans eligible to be purchased or guaranteed by the government-sponsored enterprises. The Bureau expressed concern that the expiration of the GSE Patch QM, which permits mortgage loans to borrowers whose DTI exceeds 43 percent, would significantly reduce access to responsible, affordable credit for creditworthy borrowers whose DTI exceeds 43 percent.

Under the final rule for the amended General QM, a first-lien loan in the amount of $110,260 or higher generally qualifies for QM status (assuming the other existing requirements for a General QM are satisfied, such as the product‑feature restrictions and points and fees limits) if the loan’s APR does not exceed APOR for a comparable transaction by 2.25 or more percentage points as of the date the interest rate was set. Higher thresholds apply to subordinate-lien loans, manufactured home loans, and loans with smaller loan amounts. In addition, the rule retains the existing framework for determining if a QM receives a safe harbor or rebuttable presumption for complying with the ATR requirement: first-lien loans with an APR that exceeds APOR by less than 150 basis points, or by less than 350 basis points for a subordinate-lien loan, are deemed to conclusively comply with the ATR requirement (i.e., safe harbor), while loans with spreads in excess of this threshold up to 225 basis points over APOR have rebuttable presumption of compliance with the ATR requirement. The final rule also eliminates the requirement of considering and verifying debt and income using Appendix Q. Instead, a creditor must consider income, assets, debt obligations, alimony, child support, and monthly DTI ratio or residual income in its ATR determination. Creditors are also required to verify income and debt consistent with the general ATR standard. Creditors will receive a safe harbor if they comply with the standards in in the General QM Final Rule or with revised versions of substantially similar manuals.

As noted previously, the amended General QM rule originally carried a mandatory compliance date of July 1, 2021. However, on April 20, 2021, the Bureau published a final rule that extends the mandatory compliance date by 15 months from July 1, 2021, to October 1, 2022. In doing so, the Bureau effectively extends the expiration date for the GSE Patch QM to October 1, 2022, because the expiration date for the GSE Patch was tied by rule to the mandatory compliance date of the revised General QM.

On a separate but related note, the Bureau issued a statement on February 23, 2021, that it may revisit its new QM category for seasoned loans, for which it issued a final rule in December 2020 and became effective on March 1, 2021. The Seasoned QM definition generally provides QM status to loans held in portfolio by the originating creditor (or first purchaser) for a period of at least 36 months if the loans also satisfy certain performance standards and certain other applicable criteria, even if the loans did not qualify as QMs at origination. [If the Bureau chooses to further revise or even revokes the Seasoned QM rule, it expects to consider the status of any loans originated between March 1, 2021, and the rule amending or revoking the Seasoned QM.]

Agencies issue second set of proposed amendments to the Interagency Questions and Answers (Q&As) Regarding Private Flood Insurance. On March 18, 2021, the Board, the Farm Credit Administration, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) published a proposal in the Federal Register to amend their flood insurance Q&As to address compliance questions on the private flood insurance requirements of the Biggert‒Water Flood Insurance Reform Act, for which the agencies published an implementing regulation in February 2019. The proposal has 24 Q&As concerning private flood insurance in the areas of mandatory acceptance, discretionary acceptance, and general compliance. The proposal addresses some questions for which the industry has sought guidance. For example, proposed Mandatory Q&A 1 would provide that a lender may decide to only accept private flood insurance policies under the regulation’s mandatory acceptance provision. Similarly, proposed Mandatory Q&A 9 would address whether a lender may accept a policy with a compliance aid assurance clause on the declarations page without further review. The comment period closed on May 17, 2021. The agencies also proposed other changes to their Q&As on July 6, 2020, and expect to issue one final rule for both proposals.

Agencies request information and comment on financial institutions’ use of artificial intelligence. On March 31, 2021, the Board, the Bureau, the FDIC, the NCUA, and the OCC (agencies) published a request for information (RFI) in the Federal Register seeking information and comments on financial institutions’ use of artificial intelligence (AI) in their activities, including fraud prevention, personalization of customer services, and credit underwriting. The RFI lists 17 questions for which the agencies are seeking comment or information, including views on appropriate risk management practices and challenges in developing, adopting, and managing AI . The agencies will use this information to assist in determining whether clarification on AI issues affecting safety and soundness and consumer protection laws and regulations would be helpful. The comment period closed on July 1, 2021.

The Bureau issues an interpretive rule to clarify that the scope of sex discrimination under the Equal Credit Opportunity Act (ECOA) includes sexual orientation and gender identity. Under ECOA, as implemented by Regulation B, creditors cannot discriminate against an applicant in any aspect of a credit transaction on a prohibited basis, which includes sex discrimination. 15 U.S.C. §1691(a)(1); 12 C.F.R. §1002.4(a). In Bostock v. Clayton County, Georgia, 140 S. Ct. 1731 (2020), the U.S. Supreme Court held that the federal law prohibiting sex discrimination in employment (Title VII of the Civil Rights Act of 1964) applies to an employee’s sexual orientation and gender identity. On March 16, 2021, in response to inquiries from stakeholders, the Bureau published an interpretive rule in the Federal Register to address whether Bostock affects the interpretation of ECOA because both Title VII and ECOA prohibit sex discrimination. The Bureau noted that ECOA’s legislative history indicates that “judicial constructions of anti-discrimination legislation in the employment field are intended to serve as guides in the application of ECOA.” The Bureau also cited several court decisions that applied interpretations of Title VII to ECOA. The Bureau concluded the scope of sex discrimination under ECOA includes sexual orientation or gender identity in light of Bostock.

The Bureau also clarified that this prohibition includes discriminating based on a perceived nonconformity with sex-based or gender-based stereotypes. For example, the interpretive rule states that sex discrimination occurs “if a small business lender discourages a small business owner appearing at its office from applying for a business loan and tells the prospective applicant to go home and change because, in the view of the creditor, the small business customer’s attire does not accord with the customer’s gender.” The Bureau further clarified that a person’s sex does not have to be the only or primary reason for sex discrimination to occur. Finally, the Bureau clarified that Regulation B’s prohibition against associational discrimination (i.e., discrimination based on the characteristics of individuals with whom an applicant is affiliated or associates) applies to sexual orientation and gender identity. For example, a lender denying a credit application because the applicant’s guarantor is transgendered has engaged in associational discrimination. The interpretive rule became effective on March 16, 2021.