The Federal Reserve Board this week opened for comments a Regulation Z rule that would require creditors to assess a consumer’s ability to repay a mortgage loan before making the loan, and would set minimum underwriting standards.
While the proposed rule does not apply to reverse mortgages, home equity lines of credit, timeshare plans or temporary loans, it would apply to all other consumer mortgages.
Under Dodd-Frank and Reg Z, the proposal would offer four options for meeting the ability-to-repay requirement, according to the Fed. One is to verify underwriting standards including income or assets. Another option is to make a “qualified mortgage” which provides special protection as long as the loan does not have certain characteristics (such as having to do with fees, interest rates and negative amortization). A creditor also can make a balloon payment qualified mortgage in rural or underserved areas; or can refinance a “non-standard mortgage” that has risky features into a “standard mortgage” with a lower monthly payment.
“As the industry evaluates the Qualified Mortgage standard, it will also be important to ensure that the rule establishes prudent measures to determine the consumer’s ability-to-pay without unduly restricting access to credit. Clear and objective standards, combined with a true safe harbor are necessary to ensure that the benefits of this regulation will flow through consumers. We will be analyzing and commenting on the rule with these goals in mind,” said Glen Corso, managing director of the Community Mortgage Banking Project, in a statement.
The proposed rule is open for comments through July 22, 2011.
View the proposed Ability-to-Repay rules.
View the request for comment.
Written by Elizabeth Ecker