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Proposed Ability to Repay Standards for Mortgage Loans

Outlook Live Webinar
Thursday, May 26, 2011

In April, the Federal Reserve Board issued for public comment, a proposed rule under Regulation Z that would require creditors to determine a consumer's ability to repay a mortgage loan before making the loan and would establish minimum mortgage underwriting standards. The revisions to the regulation, which implements the Truth in Lending Act (TILA), are being made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act and would apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans).

Consistent with the act, the proposal would provide four options for complying with the ability-to-repay requirement:

• First, a creditor can meet the general ability-to-repay standard by considering and verifying specified underwriting factors, such as the consumer's income or assets.
• Second, a creditor 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.
• Third, a creditor 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.
• Finally, a creditor 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.

The proposal would also implement the Dodd-Frank Act's limits on prepayment penalties.

Please join us for a discussion of the proposed rules with Maureen Yap, Senior Attorney at the Federal Reserve Board of Governors. She will present and provide insight on the proposed changes, which are due for comment on July 22, 2011, and field questions during the call to help facilitate understanding of the proposed changes.

This webinar is part of an ongoing series of events focused specifically on consumer compliance issues. The “Outlook Live” Audio Conference is a Federal Reserve System initiative produced in conjunction with the quarterly newsletter Consumer Compliance Outlook.