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:
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
(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
(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
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.
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.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
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