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.

House Republicans Take Shots at Dodd-Frank

House Republicans announced plans yesterday to pick apart last year's sweeping financial-reform, CongressDaily reported today. The GOP proposals before the House Financial Services Committee that were outlined yesterday would ease provisions dealing with derivatives clearing, liability for asset-backed securities, Securities and Exchange Commission registration requirements and data reporting. They are to be debated at a Capital Markets Subcommittee hearing on Wednesday.

FDIC

The Federal Deposit Insurance Corporation is moving to exercise its newly granted authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to become both the trustee and bankruptcy court for future distressed financial firms. Earlier this month the agency issued proposed regulations to structure resolution proceedings under the new law. Unfortunately, most of these regulations are little more than a grand exercise in reinventing the wheel.

"http://dealbook.blogs.nytimes.com/2010/10/27/resolution-rules-and-bankruptcy-reality/?scp=2&sq=bankruptcy&st=cse

FRB Issues Interim Final Rule to Replace HVCC

The Federal Reserve Board issued for public comment an interim final rule to replace HVCC, in order to implement new requirements for appraisal independence for consumer credit transactions secured by the consumer’s principal dwelling, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.


The full text of the interim final rule is available at:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20101018a1.pdf

The interim final rule is designed to: (1) ensure that real estate appraisals used to support creditors’ underwriting decisions are based on the appraiser’s independent professional judgment, free of any influence or pressure that may be exerted by parties that have an interest in the transaction; and (2) ensure that creditors and their agents pay only customary and reasonable fees to appraisers.

More specifically, the interim final rule:

• Prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment;

• Prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions;

• Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated;

• Requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities; and

• Requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors.

Compliance is optional until April 1, 2011, at which time compliance will become mandatory.

Public comments are due 60 days after the interim final rule is published in the Federal Register, which is expected shortly.