June 1, 2011

The Federal Reserve Board Seeks Comment on a Proposed Rule

The Federal Reserve Board Seeks Comment on a Proposed Rule Addressing Determination of Consumers’ Ability to Repay a Mortgage Prior to Making the Loan

The Federal Reserve Board has requested public comment on a proposed rule under Regulation Z (Truth in Lending Act) that would require creditors to determine a consumer’s ability to repay a mortgage before making the loan, establish minimum mortgage underwriting standards, and implement the Dodd-Frank Act’s limits on prepayment penalties. The proposed rule would apply to all consumer mortgage loans, except home equity lines of credit, timeshare plans, reverse mortgages and temporary loans.

The proposed rule provides four options for complying with the ability-to-repay requirement, which include:

  • First, a creditor can meet the general ability-to-repay standard by considering and verifying certain underwriting factors, including a borrower’s income or assets.
  • Second, a creditor can make a “qualified mortgage”, which gives the creditor special protection from liability, provided the loan does not have certain features, such as negative amortization, fees are within the specified limits and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years.
  • Third, a creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage. This enables creditors to provide lending options to consumers in rural and underserved areas where banks commonly make loans under this type of arrangement to hedge against interest rate risk associated with locking in loans at a fixed rate for an extended period of time.
  • Fourth, a creditor can refinance a “non-standard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment in order to preserve access to streamlined refinancing.

The comments on the proposed rule must be submitted to the Federal Reserve Board prior to July 22, 2011. The rulemaking authority established in the Truth in Lending Act will transfer to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011, therefore the finalization of the rule will fall under the authority of the CFPB. To see the Federal Reserve Board’s request for comment, click here.

If you have questions on the impact of this proposed rule, please contact the experts listed below at (800) 270-9629.