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Banking

Federal Reserve Proposes Ability-to-Repay Rules for Mortgages

mortgage document The Federal Reserve proposed a rule on April 19 that would require lenders to determine a consumer's ability to repay a mortgage before originating the loan. The proposal, which would also establish minimum mortgage underwriting standards, is being made under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The rule would apply to all consumer mortgages except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans.

Under the proposal, lenders would have four options for complying with the ability-to-repay requirement:

  • Creditors can meet the requirement by considering and verifying factors such as a consumer's income or assets.
  • Another option, the "qualified mortgage," would offer creditors special liability protection as long as the loan does not have certain features, including negative amortization. The loan also must have reasonable fees and be underwritten using the maximum interest rate in the first five years.
  • Creditors 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," the Federal Reserve said in a press release.
  • Creditors can refinance a "nonstandard mortgage" into a "standard mortgage" with a lower monthly payment, which would help preserve access to streamlined refinancings.

The proposed rule also would implement the Dodd-Frank Act's limit on prepayment penalties.

The comment period for the proposal ends July 22, 2011, after which the newly created Consumer Financial Protection Bureau will assume responsibility for finalizing the rule.

April 29, 2011