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Fed proposes new mortgage origination standards
WASHINGTON (4/20/11)--Creditors would be required to determine a consumer's ability to repay their mortgage before finalizing the loan under a Federal Reserve proposal that was unveiled on Tuesday. The Fed proposal amends the Truth in Lending Act as proscribed by language in the Dodd-Frank Wall Street Reform Act. The Fed changes also establish minimum mortgage underwriting standards. The proposal would apply to all consumer mortgages other than equity lines of credit, timeshare plans, reverse mortgages, or temporary loans, the Fed noted. Credit Union National Association (CUNA) Senior Assistant General Counsel Michael Edwards said that the mortgage rule changes reflect congress’s attempt “to require, among other things, at least some minimal underwriting of mortgage loans, in response to evidence that many non-depository mortgage lenders did not engage in safe and sound underwriting practices before the financial crisis.” The Fed proposal offers four possible ways to comply with the new requirements, including two possible alternative definitions of a the “qualifying mortgage” compliance options. In addition to making “qualifying mortgages,” other proposed compliance options include considering eight weighing factors regarding the borrower’s ability to repay as part of the underwriting process, certain types of balloon payments loans made in rural and underserved areas, and refinancing mortgages with negative amortization, interest-only payments, or balloon payments into more traditional mortgages. Under the proposal, lenders could comply by considering eight weighing factors as part of the underwriting process, such as income and assets, employment status, the monthly payment on the mortgage, the borrower’s other debt obligations, borrower’s credit rating, the borrower’s debt-to-income ratio, and similar factors. For the “qualifying mortgage” compliance option, on proposed definition of “qualifying mortgage” would be a loan of 30 years or fewer – without negative amortization, interest-only payments, or a balloon payment – that has fees and points under 3% of the loan value. The underwriting of the mortgage would need to be based on the maximum interest rate that could apply in the first five years of the loan (such as in the case of an adjustable rate mortgage), and would need to use a payment that fully amortizes the loan. Any other mortgage obligations would also need to be taken into account by the lender prior to the loan being approved. Under this alternative, making “qualifying mortgages” would be treated as a safe harbor for lenders. A second, alternative definition of “qualifying mortgage” would require much of the underwriting criteria covered above, and would provide a rebuttable presumption of compliance in place of a safe harbor. Lenders would also need to consider and verify a potential homebuyer’s employment status, debt obligations, and credit history. Monthly payments on any concurrent mortgages and the borrower’s monthly debit-to-income ratio or residual income would also need to be considered. Lenders could also offer so-called balloon-payment qualified mortgages of five 5 years or longer duration in designated “rural” or “underserved” areas if the lender complies with the “qualified mortgage” requirements and underwrites the mortgage based on the scheduled payment other than the balloon payment. Nonstandard mortgages with features such as negative amortization, interest-only payments, or balloon payments may be refinanced into standard mortgages if borrowers are able to repay their refinanced mortgage. The Fed would also require the underwriting of the newly refinanced standard mortgage to be based on the maximum interest rate possible during the first five years of the loan. The Fed will accept comments on its 474 page proposal until July 22. The final rule will be released by the Consumer Financial Protection Bureau, which will take jurisdiction over Regulation Z/Truth in Lending oversight and rulemaking on July 21. CUNA continues to analyze the Fed proposal.


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