ABILITY TO REPAY – PROPOSED REGULATIONS

Recently the Federal Reserve Board (FRB) requested comment on a proposed rule under Regulation Z that requires creditors to determine a consumer’s ability to repay a mortgage before making the loan and also establishes minimum mortgage underwriting standards. We already have a similar requirement for Section 32 mortgages, Section 35 mortgages (higher-priced mortgage loans), and for open-end credit. The requirement is being expanded to all consumer mortgage loans (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans).

The revisions are being made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal provides four options for complying with the ability-to-repay requirement. A creditor:

  1. Can meet the general ability-to-repay standard by considering and verifying specified underwriting factors, such as the consumer’s income or assets.
  2. Can make a “qualified mortgage,” which provides the creditor with special protection from liability provided the loan does not have certain features, such as negative amortization; the fees are within specified limits; and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years. The Board is soliciting comment on two alternative approaches for defining a “qualified mortgage.”
  3. Operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage. This option is meant to preserve access to credit for consumers located in rural or underserved areas where banks originate balloon loans to hedge against interest rate risk for loans held in portfolio.
  4. Can refinance a “non-standard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment. This option is meant to preserve access to streamlined refinancings.

Comments on the proposal will be accepted until July 22, 2011. General rulemaking authority for Truth in Lending Act is scheduled to transfer to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011. Accordingly, this rulemaking will be finalized by the new CFPB rather than the FRB.

The concept of a “qualified mortgage” will be a significant issue in many aspects of mortgage lending in the years to come. We will keep watch for the final regulations and the definition of “qualified mortgage.” We will let you know when action is needed.

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