FRB Issues Proposed Rule on Dodd-Frank "Ability to Repay," "Qualified Mortgage," PPPs

The Federal Reserve Board issued a proposed rule to implement the Dodd-Frank Act amendments to TILA that would require creditors to determine a consumer's ability to repay closed-end mortgage loans generally, and would establish minimum mortgage underwriting standards.



The FRB is also soliciting comment on two alternative approaches for defining a "qualified mortgage."

The FRB's notice is available at:


http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419b1.pdf

As you may recall, Regulation Z currently prohibits a creditor from making a "higher-priced" mortgage loan without regard to the consumer's ability to repay the loan. The Dodd-Frank Act expanded the scope of the ability-to-repay requirement to cover any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan). The Dodd-Frank Act also placed limits on prepayment penalties.

The proposal would apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans), and provides the following four options for complying with the ability-to-repay requirement:

(1) A creditor can meet the general ability-to-repay standard by considering and verifying certain specified underwriting factors, such as the consumer's income or assets, debt obligations, and credit history.
Underwriting the payment for an adjustable-rate mortgage loan is to be based on the fully indexed rate;

(2) 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). Importantly, the FRB is soliciting comment on two alternative approaches for defining a "qualified mortgage."

(3) 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.

(4) 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. In addition, the proposal would require creditors to retain evidence of compliance with this rule for three years after a loan is consummated.


http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419b1.pdf

Under Dodd-Frank, the proposal would provide four options for complying with the ability-to-repay requirement.



http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419a1.pdf

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 gives the creditor 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.


Regulators are currently soliciting comment on alternative approaches for defining a “qualified mortgage.”


Third, a creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage.


a creditor can refinance a “non-standard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment.

The FRB reminds that general rulemaking authority for TILA is scheduled to transfer to the Consumer Financial Protection Bureau (or, "CFPB") on July 21, 2011. Accordingly, the FRB states that this rulemaking will become a proposal of the CFPB and will not be finalized by the FRB.







The comments deadline is July 22, 2011.