The Federal Reserve Board recently requested public comments on a proposed rule under Regulation Z that would require creditors to determine a consumer’s ability to repay a mortgage 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. The proposal would apply to all consumer mortgages. The proposal would provide four options for complying with the ability-to-repay requirement. First, a creditor can meet the general ability-torepay 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 that 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. Finally, a creditor can refinance a “non-standard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment. The proposal would also implement the Dodd-Frank Act’s limits on prepayment penalties. The comment period ends on July 22, 2011.