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Fed Proposes “Ability-to-Repay” Mortgage Lending Rules

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Fed Proposes “Ability-to-Repay” Mortgage Lending Rules Powered By Docstoc
					  Fed Proposes “Ability-to-Repay” Mortgage Lending
                        Rules
The Federal Reserve Board (Fed) has proposed rules to implement the minimum
mortgage underwriting standards required by Title XIV of the Dodd-Frank
Act. Congress intended this part of the Act 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‘s jurisdiction over Regulation Z/Truth in Lending
transfers to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011, so the
CFPB will be the agency finalizing the rule.

The Fed will be accepting comments until July 22, 2011; please submit comments to
CUNA by July 15, 2011. Please feel free to e-mail your responses to SVP and Deputy
General Counsel Mary Dunn (mdunn@cuna.coop) or Senior Assistant General Counsel
Michael Edwards (medwards@cuna.coop). You can also mail them to CUNA‘s
Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th
Floor, Washington, DC 20004. Comments can be submitted to the Fed at
regs.comments@federalreserve.gov; if commenting directly to the Fed please reference
Docket No. R-1417 in the subject line of the email. You may access a copy of the Fed‘s
proposal here.

Executive Summary

The Fed proposes four possible compliance options that would meet the requirement for
lenders to do at least a minimum level of mortgage underwriting:

   1. A ―General Ability-to-Repay Standard‖ that would require lenders offering most
      types of residential mortgage products to consider 8 weighing factors such as
      income and assets, employment status, the monthly payment on the mortgage,
      the borrower‘s other debt obligations, debt-to-income ratio, credit history, etc. In
      the case of an adjustable rate mortgage (ARM) the lender would also have to
      underwrite the payment on the ARM at the ―fully indexed rate‖—which the
      proposal would define as ―the interest rate calculated using the index or formula
      at the time of consummation and the maximum margin that can apply at any time
      during the loan term‖—or based on the introductory interest rate if it is greater
      than the fully indexed rate.



                                                                                         1
2. A ―qualified mortgage.‖ The Fed proposed two alternative definitions of ―qualified
   mortgage‖—the making of which would either provide a ―safe harbor‖ or a
   ―presumption of compliance‖—for comment:

       a. ―Alternative 1‖ would provide a safe harbor and define ―qualified mortgage‖
          as 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, is underwritten with a ―considered and verified‖ ability-to-
          pay determination, and the underwriting of the mortgage is (A) based on
          the maximum interest rate that could apply in the first 5 years (in the case
          of an ARM), (B) uses a payment that fully amortizes the loan; and (C)
          takes into account any other mortgage obligations of the borrower.
   OR
       b. ―Alternative 2‖ would provide a rebuttable presumption of compliance
          (instead of a safe harbor) and would require the ―Alternative 1‖
          underwriting criteria as well as also require consideration and verification
          of (A) the consumer employment status, (B) the consumer‘s monthly
          payment on any simultaneous mortgage, (C) the consumer‘s debt
          obligations, (D) the consumer‘s monthly debit-to-income ratio or residual
          income, and (E) the consumer‘s credit history.

3. ―Balloon-Payment Qualified Mortgage‖ in rural and underserved areas. In order
   to preserve access to credit for consumers in ―rural‖ or ―underserved‖ areas
   (although the Fed‘s definitions of ―rural‖ and ―underserved‖ as significantly more
   restrictive than NCUA‘s definitions of ―rural district‖ or ―underserved area‖), the
   Fed is proposing to allow lenders to make ―a balloon-payment qualified
   mortgage‖ of 5 years or longer duration if the lender (a) complies with the
   requirements of a qualified mortgage; and (b) underwrites the mortgage based
   on the scheduled payment other than the balloon payment.

4. ―Refinancing of a Non-Standard Mortgage.‖ This aspect of the proposal would
   allow a lender to refinance a ―nonstandard mortgage with risky features‖ such as
   negative amortization, interest-only payments or balloon payments into a so-
   called standard mortgage by following the proposed ―ability to repay criteria‖
   except for the requirement to consider and verify the consumer‘s income or
   assets so long as the underwriting of the ―standard mortgage‖ was based on the
   maximum interest rate possible during the first five years of the loan (such as in
   the case of an ARM).




                                                                                         2
Detailed Summary

“Minimum Standards for Transactions Secured by a Dwelling” (12 C.F.R. §
226.43):

         Scope: Proposed section 226.43 would establish minimum standards for most
         consumer mortgages secured by a ―dwelling,‖1 but not including:

             o Extensions of credit primarily for a business, commercial, or agricultural
               purpose even if it is secured by a dwelling;

             o Home equity lines of credit;

             o Mortgages secured by interests in time-share plans; or

             o Partial exemption for reverse mortgages and bridge loans: The following
               products are exempt from this rule‘s requirements regarding ―repayment
               ability,‖ ―refinancing of non-standard mortgages,‖ ―qualified mortgage,‖
               and ―balloon-payment qualified mortgages by certain creditors‖ (see
               below for additional information about these requirements):

                         Reverse mortgages, and

                         Temporary or ―bridge‖ loans with a term of 12 months or less (not
                          including the time period included in any renewal period).

         Definitions:

             o “Covered Transaction:” ―Covered transaction means a consumer credit
               transaction that is secured by a dwelling, as defined in § 226.2(a)(19),2
               other than a transaction exempt from coverage . . .‖ under the ―Scope‖
               provisions outlined immediately above.

             o Proposed Criteria for “Qualified Mortgages:” The Fed has proposed
               alternative approaches for various aspects of the ―qualified mortgage‖
               definition; these are generally labeled ―Alternative 1‖ and ―Alternative 2‖
               although each set of possible alternatives is unrelated to the other sets of
               alternatives (i.e. the agency is likely to select both some of the
               ―Alternative 1‖s and some of the ―Alternative 2‖s it has proposed). The
               proposed ―qualified mortgage‖ criteria are as follows:




1
  ―Dwelling means a residential structure that contains one to four units, whether or not that structure is
attached to real property. The term includes an individual condominium unit, cooperative unit, mobile
home, and trailer, if it is used as a residence.‖ 12 C.F.R. 226.2(a)(19).
2
  See note 1, above.

                                                                                                              3
   Safe Harbor vs. Presumption of Compliance: The Fed
    proposes either a non-rebuttable ―safe harbor‖ or a rebuttable
    ―presumption of compliance:‖

          Alternative 1: “Safe Harbor:” Under the possible safe
          harbor alternative, a creditor would comply with the
          repayment ability requirements (see below) if the
          transaction meets this section‘s definition of ―qualified
          mortgage‖ (see below).

          Alternative 2: “Presumption of Compliance:” Under the
          possible presumption of compliance alternative, a creditor
          would be presumed to have complied with the repayment
          ability requirements if the transaction meets the definition of
          ―qualified mortgage,‖ but this presumption of compliance
          could be rebutted. (―For example, evidence of a high debt-
          to-income ratio with no compensating factors, such as
          adequate residual income, could be sufficient to rebut the
          presumption.‖).

   Definition of a “Qualified Mortgage:” A qualified mortgage is a
    transaction coming within the scope of this rule (see above):

          That provides regular periodic payments that do not:

              o Result in an increase of the principal balance

              o Allow the consumer to defer repayment of principal
                (except for some balloon payment mortgages made
                by certain creditors operating predominantly in an
                underserved or rural area, as further explained
                below); or

              o Result in a balloon payment (except for some balloon
                payment mortgages made by certain creditors
                operating predominantly in an underserved or rural
                area, as further explained below).

          The mortgage is a 30 year or shorter mortgage;

          Total points and fees payable in connection with the loan do
          not exceed amounts allowed by the ―limitation on points and
          fees for qualified mortgages‖ outlined below;

          The creditor underwrites the loan (taking into account any
          mortgage-related obligations, as defined below) using:



                                                                        4
   o The maximum interest rate that may apply during the
     first five years after closing; and

   o Periodic payments of principal and interest that will
     repay either:

            The outstanding principal balance over the
             remaining term of an ARM as of the date the
             interest rate adjusts to the maximum interest
             rate that may apply during the first five years
             after closing; or

            The loan amount over the loan term.

Alternative Approaches for Considering and Verifying
Income and Assets:

   o Alternative 1: Under possible Alternative 1 for this
     requirement, a creditor would need to consider and
     verify the consumer‘s current or reasonably expected
     income or assets to determine repayment ability by
     considering:

            The consumer‘s current or reasonably
             expected income or assets (other than the
             value of the dwelling securing the mortgage);

            That the creditor verifies using third-party
             records (such as IRS tax transcripts, tax
             returns, financial institution records, etc.) that
             provide reasonably accurate evidence of the
             consumer‘s income or assets.

   o Alternative 2: Under possible Alternative 2 for this
     requirement, a creditor would need to review and
     consider the following:

            The consumer‘s current or reasonably
             expected income or assets (other than the
             value of the dwelling securing the mortgage);

            If the creditor relies on income from the
             consumer‘s employment, the consumer‘s
             employment status (which could be verified by
             orally by the consumer if the creditor makes a
             written record);



                                                                  5
                       The consumer‘s monthly payment on any
                        ―simultaneous loan‖ (such as a second lien
                        mortgage that provides funds for the down-
                        payment on the first mortgage);

                       The consumer‘s current debt obligations;

                       The consumer‘s monthly debt-to-income ratio
                        or residual income (as further explained
                        below); and

                       The consumer‘s credit history.

   Alternative Approaches for Limits on Points and Fees for
    Qualified Mortgages:

          Alternative 1: Under possible Alternative 1 for this
          requirement, a covered transaction is not a ―qualified
          mortgage‖ unless the total points and fees do not exceed:

             o For a loan of $75,000 or more, 3 percent of the total
               loan amount;

             o For a loan of at least $60,000 but less than $75,000,
               3.5 percent of the total loan amount;

             o For a loan of at least $40,000 but less than $60,000,
               4 percent of the total loan amount;

             o For a loan of at least $20,000 but less than $40,000,
               4.5 percent of the total loan amount; and

             o For a loan of less than $20,000, five percent of the
               total loan amount.

          Alternative 2: Under possible Alternative 2 for this
          requirement, a covered transaction is not a ―qualified
          mortgage‖ unless the total points and fees do not exceed:

             o For a loan of $75,000 or more, 3 percent of the total
               loan amount;

             o For a loan of at least $20,000 but less than $75,000,
               3.5 percent of the total loan amount, the following
               formula:

                       Total loan amount - $20,000 = $Z;


                                                                       6
                                                 $Z x 0.0036 = Y;

                                                 500 - Y = X; and

                                                 X x 0.01 = Allowable points and fees as a
                                                  percentage of the total loan amount; and

                                     o For a loan of less than $20,000, five percent of the
                                       total loan amount.

                                 Exclusions: For all proposed approaches, the proposal
                                 would exclude the following from the total points and fees
                                 calculation:

                                     o Any bona fide third party charge not retained by the
                                       creditor, loan originator, or an affiliate of either unless
                                       the charge is required to be included in points and
                                       fees under the higher-priced mortgage loan
                                       regulation (see 12 C.F.R. § 226.32 as summarized
                                       below under ―Higher-Priced Closed-End Home
                                       Mortgage Requirements;‖ this would generally
                                       include items required to be included in the ―finance
                                       charge‖ subject to several exclusions);

                                     o Up to two bona fide discount points paid by the
                                       consumer in connection with the mortgage, so long
                                       as:

                                                 The interest rate before the discount does not
                                                  exceed average prime offer rate (APOR)3 by
                                                  more than one percent; and

                                                 The APOR used in this calculation is the same
                                                  APOR that applies to comparable transaction
                                                  as of the date the discounted interest rate for
                                                  the transaction is set.

                                     o Up to one bona fide discount point, so long as:

                                                 The interest rate does not exceed the APOR
                                                  by more than two percent;

                                                 The APOR used in this calculation is the same
                                                  APOR that applies to comparable transaction

3
 The APOR is currently calculated by the Federal Financial Institutions Examination Council (FFIEC),
and is available on the FFIEC‘s website here. APOR is calculated relative to the average rates on
various classes of mortgages and is not related to the ―prime rate‖ published by the Wall Street Journal.

                                                                                                            7
                         as of the date the discounted interest rate for
                         the transaction is set; and

                        Two bona fide discount points have not been
                         excluded under the exemption described
                         immediately above.

              o Definition of ―bona fide discount point:‖ ―Bona fide
                discount point‖ would be defined as ―any percent of
                the loan amount of a covered transaction paid by the
                consumer that reduces the interest rate or time-price
                differential applicable to the covered transaction
                based on a calculation that:

                        ―Is consistent with established practices for
                         determining the amount of reduction in the
                         interest rate or time-price differential
                         appropriate for the amount of discount points
                         paid by the consumer; and

                        ―Accounts for the amount of compensation
                         that the creditor can reasonably expect to
                         receive from secondary market investors in
                         return for the mortgage loan.‖

   “Balloon-Payment Qualified Mortgages Made By Certain
    Creditors” Operating in Underserved or Rural Areas: The
    proposed rule would allow some types of balloon-payment
    mortgages to be considered ―qualified mortgages‖ if the loan is
    made by a creditor operating predominantly in an ―underserved‖ or
    ―rural‖ area (note that the proposed definitions of ―underserved‖
    and ―rural,‖ as explained below, are far more restrictive that the
    NCUA definitions of ―underserved area‖ or ―rural district‖) so long
    as:

          The loan satisfies the requirements for a ―qualified
          mortgage‖ other than:

              o The requirement that a consumer not be allowed to
                defer repayment of principal;

              o The prohibition on balloon payments; or

              o The requirement that the creditor underwrites the
                loan (taking into account any mortgage-related
                obligations, as defined below) using:



                                                                           8
               The maximum interest rate that may apply
                during the first five years after closing; and

               Periodic payments of principal and interest
                that will repay either:

                       The outstanding principal balance over
                       the remaining term of an ARM as of the
                       date the interest rate adjusts to the
                       maximum interest rate that may apply
                       during the first five years after closing;
                       or

                       The loan amount over the loan term.

The creditor determines that the consumer can make all of
the scheduled payments, except the balloon payment, from
the consumer‘s current or reasonably expected income or
assets (other than the dwelling securing the mortgage);

The scheduled payments used for the above determination
are based on:

   o    An amortization period that does not exceed 30
       years; and

   o Includes all ―mortgage-related obligations‖ (as
     defined below).

The term of the mortgage is at least 5 years; and

The creditor:

   o Predominantly in “Underserved” or “Rural”
     Areas: During the preceding calendar year, extended
     more than 50% of its total covered transactions that
     provide for balloon payments in one or more counties
     designated by the agency as ―underserved‖ or ―rural,‖
     as explained below;

   o Alternatives for Maximum Dollar Value vs.
     Maximum Number or Transactions:

               Alternative 1: Under possible Alternative 1 for
                this requirement, a creditor under this
                exemption would be limited by an unspecified
                maximum aggregate dollar amount for all
                covered transactions (including balloon

                                                                 9
             payment mortgages as well as all other
             covered transactions);

            Alternative 2: Under possible Alternative 2 for
             this requirement, a creditor under this
             exemption would be limited to a maximum
             number of covered transactions (including all
             balloon payment mortgages as well all other
             covered transactions).

   o Alternatives for Prohibited Sale of Balloon
     Payment Loans:

            Alternative 1: Under possible Alternative 1
             for this requirement, it would be prohibited for
             a lender falling within this exemption to—on or
             after the effective date of this regulation—to
             sell, assign, or otherwise transfer legal title to
             any covered transaction that involves a
             balloon payment;

            Alternative 2: Under possible Alternative 2
             for this requirement, it would be prohibited—
             during the preceding and current calendar
             year— for a creditor to have sold, assigned or
             otherwise transferred legal title to a mortgage
             with a balloon payment (i.e. the exemption
             would not apply to a creditor that had sold any
             balloon payment loans during the calendar
             year during which the regulation takes effect
             or during the prior year, even if the sale took
             place before the regulation became effective).

   o Asset Threshold Limitation: As of the end of the
     preceding calendar year, the creditor had total assets
     that did not exceed an asset threshold established by
     the agency that is annually adjusted for inflation; for
     calendar year 2011, that asset threshold is
     $2,000,000,000.

Definition of “Underserved” and “Rural:” The proposed
definitions of ―underserved‖ and ―rural‖ are significantly
more restrictive than NCUA‘s definitions of ―underserved
area‖ and ―rural district:‖

   o ―Underserved:‖ A county would only be considered
     ―underserved‖ if no more than two creditors extended

                                                            10
                 covered transactions five or more times in the county
                 during the prior calendar year.

              o ―Rural:‖ A county would only be considered ―rural‖ if,
                during the calendar year in question, the county is
                not in a metropolitan statistical area or a micropolitan
                statistical area (as defined by the Office of
                Management and Budget), and:

                        The county is not adjacent to any metropolitan
                         statistical area or micropolitan statistical area;
                         or

                        The county is:

                                Adjacent to a metropolitan statistical
                                area with fewer than one million
                                residents; or

                                Is adjacent to a micropolitan statistical
                                area, and the county has no town with
                                2,500 or more residents.

   Prepayment Penalties: (Note that, as proposed: (1) in order to
    offer a consumer a mortgage with a prepayment penalty, the
    creditor must offer an ―alternative‖ without a prepayment penalty;
    and (2) the Fed has proposed a definition of ―prepayment penalty‖
    that has a broader definition than what NCUA and most courts
    have held are ―prepayment penalties, as explained below.):

          ―When permitted:‖ A covered transaction must not include a
          prepayment penalty unless:

              o The prepayment penalty is otherwise permitted by
                law; and

              o The transaction:

                        Has an annual percentage rate (APR) that
                         cannot increase after consummation;

                        Is a ―qualified mortgage;‖

                        And is not a higher priced mortgage loan
                         subject to 12 C.F.R. § 226.45(a) (as explained
                         in further detail below).



                                                                         11
                                 ―Limits on prepayment penalties:‖ As proposed, a
                                 prepayment penalty:

                                     o Must not apply after a three-year period following
                                       closing; and

                                     o Must not exceed the following percentages of the
                                       amount of outstanding loan balance prepaid:

                                                 Three percent, if incurred in the first year after
                                                  closing;

                                                 Two percent, if incurred during the second
                                                  year following closing; and

                                                 One percent, if incurred during the third year
                                                  following consummation.

                                 ―Alternative offer required:‖ A creditor cannot offer a
                                 consumer a covered transaction with a prepayment penalty
                                 unless the creditor also offers a covered transaction that
                                 does not have a prepayment penalty and the alternative
                                 transaction (note that loans made through mortgage brokers
                                 have slightly different rules, as explained below):

                                     o Has an APR that cannot increase after
                                       consummation and has the same type of interest rate
                                       as the covered transaction. In this context, ―type of
                                       interest rate‖ refers to whether a transaction:

                                                 Is a fixed-rate mortgage;4or

                                                 Is a step-rate mortgage;5

                                     o Has the same loan term as the loan term for the
                                       mortgage with a prepayment penalty;

                                     o Provides for periodic payments that do not increase
                                       or allow the consumer to defer paying principal
                                       (unless it is a ―Balloon-Payment Qualified Mortgages
                                       Made By Certain Creditors‖ as defined above);



4
   ―The term ‗fixed-rate mortgage‘ means a transaction secured by real property or a dwelling that is not
an adjustable-rate mortgage or a step-rate mortgage.‖ 12 C.F.R. § 226.18(s)(7)(iii).
5
  ―The term ‗step-rate mortgage‘ means a transaction secured by real property or a dwelling for which the
interest rate will change after consummation, and the rates that will apply and the periods for which they
will apply are known at consummation.‖ 12 C.F.R. § 226.18(s)(7)(ii).

                                                                                                        12
                                      o Does not have points and fees in excess of that
                                        permitted by this regulation (see above), based on
                                        information known to the creditor at the time the
                                        alternative is offered; and

                                      o Is a transaction for which the creditor has a good
                                        faith belief that the consumer likely qualifies, based
                                        on the information known to the creditor at the time
                                        the creditor offers the alternative mortgage without a
                                        prepayment penalty.

                                  “Offer Through a Mortgage Broker:” If the creditor offers
                                  a transaction with a prepayment penalty to the consumer
                                  through a mortgage broker,6 the creditor must:

                                      o Present the mortgage broker an alternative covered
                                        transaction that meets the above ―alternative
                                        mortgage‖ requirements; and

                                      o Establish by agreement that the mortgage broker
                                        must present the consumer an alternative mortgage
                                        within the meaning of this rule that does not have a
                                        prepayment penalty and is offered by either:

                                                  The creditor; or

                                                  Another creditor, if the transaction offered by
                                                   the other creditor has a lower interest rate or a
                                                   lower total dollar amount of origination points
                                                   or fees and discount points.

                                  “Creditor that is a Loan Originator:” If a creditor is a ―loan
                                  originator‖7 and the creditor presents the consumer with a
                                  mortgage with a prepayment penalty offered by the
                                  assignee of the mortgage, the loan originator must also offer
                                  as an alternative covered transaction without a prepayment
                                  penalty (that meets the requirements of this rule) offered by:

                                      o The assignee; or

6
   ―Mortgage broker. For purposes of this section, a mortgage broker with respect to a particular
transaction is any loan originator that is not an employee of the creditor.‖ 12 C.F.R. § 226.36(a)(2).
7
  ―[T]he term ‗loan originator‘ means with respect to a particular transaction, a person who for
compensation or other monetary gain, or in expectation of compensation or other monetary gain,
arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. The term
‗loan originator‘ includes an employee of the creditor if the employee meets this definition. The term ‗loan
originator‘ includes the creditor only if the creditor does not provide the funds for the transaction at
consummation out of the creditor's own resources, including drawing on a bona fide warehouse line of
credit, or out of deposits held by the creditor.‖ 12 C.F.R. § 226.36(a)(1).

                                                                                                          13
   o Another person (such as a different financial
     institution), if the transaction offered by the other
     person has a lower interest rate or lower total dollar
     amount of origination points or fees and discount
     points.

“Applicability:” The rules on prepayment penalties and
alternative offers only apply if a covered transaction is
consummated with a prepayment penalty and is not violated
if:

   o A covered transaction is consummated without a
     prepayment penalty; or

   o The creditor and consumer do not consummate a
     covered transaction.

―Prepayment Penalty‖ Definition: ―Prepayment penalty‖
means ―a charge imposed for paying all or part of a covered
transaction‘s principal before the date on which the principal
is due‖ (other than fees for preparing and providing
documents when a loan is paid in full, such as a payoff
statement), including:

   o Recoupment of Waived Closing Costs: A fee, such
     as a closing cost, that is waived unless the consumer
     prepays the loan (Note: Recoupment of waived fees
     in this situation are not generally considered
     ―prepayment penalties‖ under the Federal Credit
     Union Act—see NCUA legal opinion letter 08-0731—
     but would be considered ―prepayment penalties‖
     under Regulation Z if this aspect of the rule is
     finalized as proposed); and

   o Amortized Interest Occurring After Prepayment: A
     charge determined by treating the loan balance as
     outstanding for a period of time after prepayment in
     full even if the charge results from the interest
     accrual amortization method used for other payments
     in the transaction (e.g., if a mortgage amortizes
     monthly on the first of the month and the borrower
     prepays in full on the 5th of the month, but the creditor
     continues to charge interest as though the loan were




                                                           14
                                           still outstanding until the end of the monthly
                                           amortization period).8

                         “Evasion; open-end credit:” ―In connection with credit secured
                          by a consumer‘s dwelling that does not meet the definition of open-
                          end credit in § 226.2(a)(20),9 a creditor shall not structure a home-
                          secured loan as an open-end plan to evade the requirements of
                          this section.‖

             o    “Repayment Ability:”

                         General Requirement: A creditor may not make a covered
                          transaction unless the creditor makes a reasonable and good faith
                          determination that the consumer will have a reasonable ability to
                          repay the loan (including mortgage-related obligations like
                          insurance and taxes) as of the closing date.

                                  Interaction with Regulation B: Note that the Equal Credit
                                  Opportunity Act (Regulation B) generally prohibits many
                                  questions in connection with a credit application that would
                                  seemingly be required in this repayment ability
                                  determination, such as whether the borrower intends to
                                  have children, whether the borrower‘s income is from
                                  alimony, and so forth. The Official Staff Commentary to this
                                  proposed Regulation Z amendment states that these
                                  provisions ―do not require or permit the creditor to make
                                  inquiries or verifications that would be prohibited by
                                  Regulation B, 12 C.F.R. part 202.‖

                         Basis for Repayment Ability Determination: A creditor must
                          generally consider the following factors when making a repayment
                          ability determination:

                                  The consumer‘s current or reasonably expected income or
                                  assets (not including the value of the home being
                                  mortgaged) to the extent necessary to qualify for the

8
  Most courts have held that this method is not a ―prepayment penalty‖. See, e.g., Goldman v. First Fed.
Sav. & Loan Ass’n, 518 F.2d 1247, 1252 (7th Cir. 1975) (Opinion by recently retired Supreme Court
Justice John Paul Stevens) (―The proper test [for determining whether or not a charge is a ―prepayment
penalty‖], it seems to us, is whether there is a charge imposed if the note were paid at maturity instead of
at an earlier date. Moreover, the nature of any such charge, rather than the amount, should be
determinative . . .‖):
9
  ―Open-end credit means consumer credit extended by a creditor under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any
limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.‖
12 C.F.R. § 226.2(a)(20).

                                                                                                           15
mortgage, such as salary, wages, self-employment income,
military or reserve duty income, bonus pay, tips,
commission, interest payments, dividends, retirement
benefits or entitlements, rental income, royalty payments,
trust income, public assistance payments, and alimony,
child support, and separate maintenance payments (except
that, as noted above, Regulation B may prohibit the creditor
from asking about alimony and certain other types of
income);

   o Expected income: Expected income must be verified
     with third-party records, such as—if the creditor is
     relying on the consumer‘s expected bonus—by
     verifying the consumer‘s past bonuses or, if the
     income being used is from a job the consumer‘s has
     been promised in the future (such as a first job out of
     school), a written verification from the employer
     stating that the consumer will be employed in the
     future at a specified salary;

   o Seasonal or irregular income: A creditor may rely on
     seasonal or irregular income so long as it would be
     sufficient to pay the loan on a monthly basis. For
     example, if the consumer‘s income is from the sale of
     crops, whether the income from the sale of crops
     during harvest season would be sufficient to make
     the monthly mortgage payments for the entire year;

The consumer‘s current employment status (if employment
income—as opposed to income from investments or the
consumer‘s savings or other assets, etc.—is being used in
the ability to repay analysis); employment may be full-time,
part-time, seasonal, irregular, military, or self-employment.
Military employment status may be verified by using a
Department of Defense electronic database;

The consumer‘s monthly payment on the mortgage;

The consumer‘s monthly payment on any simultaneous loan
(such as a second lien mortgage made before or at the time
of the covered transaction, including a HELOC, that
provides funds for the down-payment on the first mortgage)
that the creditor knows of or has reason to believe will be
made (this does not include a second lien mortgage made
after the first lien mortgage is consummated);



                                                            16
           The consumer‘s monthly payment for mortgage-related
           obligations such as insurance and taxes (whether or not
           there is an escrow account established), as verified by
           reasonably reliable records, based on best estimates that
           do not take into account potential changes like future tax or
           insurance premium increases; if these obligations are not
           paid monthly the creditor may look to widely-accepted
           governmental or non-governmental standards for
           determining a pro rata monthly amount;

           The consumer‘s current debt obligations; the creditor may
           look to widely accepted governmental and non-
           governmental underwriting standards, such as student
           loans, automobile loans, revolving debt, alimony, child
           support, and existing mortgages, as verified by a credit
           report, loan statements, court orders, etc.;

              o Note on credit reports: If a consumer lists a debt on
                a loan application that does not appear on his or her
                credit report, the creditor must consider the obligation
                but does not need to verify the existence or amount
                of the obligation through another source.

           The consumer‘s monthly debt-to-income ratio, or residual
           income; and

           The consumer‘s credit history.

   Verification Using Third-Party Records: A creditor must use
    ―third-party records‖ specific to the consumer in question, such as
    credit reports, pay stubs, tax returns, bank statements, and so forth
    to verify the consumer‘s repayment ability (which can be
    transmitted electronically and/or obtained directly from the
    consumer)—including a form a creditor provides a third-party, even
    if the creditor fills out parts of the form unrelated to the information
    sought like the name of the consumer or the third-party—except:

           A consumer can orally verify his or her employment status if
           the creditor makes a record of this information;

           A creditor does not need to verify the existence of a debt
           that is not listed on the consumer‘s credit report but which
           the consumer listed on his or her loan application.

   Verification of Income or Assets: A creditor must verify the
    amounts of income or assets that it relies on for the repayment
    ability calculation using reasonably-reliable third-party records (but

                                                                          17
    does not need to verify all income and/or assets if those verified
    demonstrate sufficient repayment ability, including in the case of
    multiple applicants), such as IRS tax transcripts, tax returns, W-2
    and similar tax forms, payroll statements, financial institution
    records, paystubs or similar records, government agency records
    about income from benefits or entitlements (such as Social
    Security Administration ―proof of income‖ letters), check cashing
    receipts, and receipts from the consumer‘s use of a funds transfer
    service.

   Payment Calculation:

          In General: A creditor must generally make the repayment
          ability determination using: (1) the ―fully indexed rate‖ (see
          below) or any introductory rate, whichever is greater, and
          (2) monthly, fully-amortizing payments that are substantially
          equal.

          Special Rules for Balloon, Interest-Only, and Negative
          Amortization Loans:

              o For mortgages with balloon payments, the creditor
                must make the ability to repay determination using:

                        If the mortgage is not ―higher-priced,‖ the
                         maximum payment scheduled during the first
                         five years of the loan (measured from the
                         closing date); or

                        If the mortgage is ―higher-priced,‖ the
                         maximum payment in the payment schedule,
                         including any balloon payment.

              o For mortgages with interest-only features, the
                determination must be made using: (1) the ―fully
                indexed rate‖ or any introductory rate, whichever is
                greater, and (2) monthly, fully-amortizing payments
                that are substantially equal and that will repay the
                loan amount over the term of the loan remaining as
                of the date the loan is ―recast‖ (i.e. the date that an
                interest-only period or introductory rate expires).

              o For mortgages with negative amortization, the
                determination must be made using: (1) the ―fully
                indexed rate‖ or any introductory rate, whichever is
                greater, and (2) monthly (even if the consumer will
                pay the mortgage quarterly or bi-weekly) fully-

                                                                          18
      amortizing payments that are substantially equal (i.e.
      disregarding ―minor variations‖ dues to payment-
      schedule irregularities and so forth) and that will
      repay the loan amount over the term of the loan
      remaining as of the date the loan is ―recast‖ (i.e. the
      date that an interest-only period or introductory rate
      expires).

Payment Calculation for Simultaneous Loans: As
mentioned above, creditors must take into account in the
repayment ability analysis any ―simultaneous loans‖ (i.e.
second-lien loans made at the same time as the first-lien
mortgage), including closed-end second liens on a dwelling
that do not fall within one of this regulation‘s exemptions
(such as for certain creditors operating in rural or
underserved areas) and home-equity lines of credit.

Monthly Debt-to-Income Ratio or Residual Income:

   o ―Total monthly debt obligations‖ would be defined as
     the sum of:

             The payment on the mortgage;

             The payment on any simultaneous loan;

             The payment of mortgage-related obligations
              such as insurance and taxes; and

             The payments on current debt obligations.

   o ―Total monthly income‖, would be defined as ―the
     sum of the consumer‘s current or reasonably
     expected income, including any income from assets .
     . .‖

   o Calculations (if the creditor does both calculations,
     the creditor may base the determination on either,
     even if the ability-to-repay determination would be
     different):

             ―Monthly debt-to-income ratio,‖ if using this
              calculation, creditors would need to consider
              the ratio of a consumer‘s monthly debt
              obligations to total monthly income.

             ―Monthly residual income,‖ if using this
              calculation, the creditor must consider the

                                                             19
                              consumer‘s remaining income after
                              subtracting the consumer‘s total monthly debt
                              obligations.

                                    Compensating factors: The creditor
                                    may consider mitigating factors, such
                                    as the consumer‘s assets, etc., as a
                                    compensating factor for a higher debt-
                                    to-income ratio or lower residual
                                    income.

o Refinancing of “non-standard mortgages” into “standard
  mortgages:” When a creditor that holds a mortgage note or a servicer
  acting on the holder‘s behalf refinances a ―non-standard mortgage‖—i.e.
  adjustable rate mortgages (ARMs) with a fixed rate for one year or longer
  (such as 2/28, 3/27, and 5/25 ARMs), interest only mortgages, or
  mortgages with negative amortization, as further defined below—into a
  ―standard mortgage‖ with ―materially lower‖ monthly payments, the
  following rules providing exemptions from certain requirements would
  apply:

                The creditor or servicer must receive a written application
                for the standard mortgage prior to recasting the mortgage;

                The consumer has made no more than one payment more
                than 30 days later on the non-standard mortgage during the
                24 months immediate preceding the creditor receiving the
                application for a standard mortgage;

                The consumer has made no payments more than 30 days
                late on any obligations during the six months immediately
                preceding the creditor‘s receipt of the standard mortgage
                application; and

                With funds from the ―standard mortgage‖ only being able to
                be used to: (1) paying off the non-standard mortgage and
                (2) paying closing costs and escrow amount required at or
                before closing.

         Exemption from certain ability to repay requirements: A creditor
          refinancing a non-standard mortgage into a standard mortgage is
          not required to comply with the income and asset verification
          requirements outlined above, so long as:

                This section‘s requirements, such as ―materially lower‖
                payments (see below), a written application (see above),


                                                                            20
          criteria regarding 30 day delinquent payments (see above),
          and so forth, are met; and

          ―The creditor has considered whether the standard
          mortgage will prevent a likely default by the consumer on
          the non-standard mortgage at the time of its recast.‖

              o This is proposed as a two-part determination: (1) the
                creditor must consider whether the consumer is likely
                to default on the existing, non-standard mortgage,
                and (2) the creditor must consider whether the new,
                standard mortgage will prevent the consumer‘s
                default.

              o Default on New, Standard Mortgage: In considering
                whether the consumer is likely to default on the new,
                standard mortgage once it is recast (from a non-
                standards mortgage), ―a creditor may look to widely-
                accepted governmental and non-governmental
                standards for analyzing a consumer‘s likelihood of
                default.‖

   Ability to repay calculation for the replacement standard mortgage:
    The ability to repay ―payment calculation‖ (which is explained in
    general under ―Payment Calculation,‖ above) for a standard
    mortgage replacing a non-standard mortgage must be made based
    on substantially equal, fully amortizing payments based on the
    maximum interest rate that may apply during the first five years
    after consummation.

   ―Materially lower‖ payments comparison calculation: For purposes
    of determining whether the monthly payment on a standard
    mortgage is ―materially lower‖ than a non-standard mortgage it is
    replacing, the following rules apply (―[i]n all cases, a payment
    reduction of 10 percent or more meets the ‗materially lower‘
    standard‖):

          Non-standard mortgage payment calculation: For purposes
          of comparison, the creditor shall calculate the payment on
          the existing non-standard mortgage using this formula:

              o The ―fully indexed rate‖ (see below) as of a
                reasonable period of time before or after the date the
                creditor receives the consumer written application to
                refinance into a standard mortgage;




                                                                      21
                    o The term of the mortgage remaining at the time the
                      loan is ―recast‖ (i.e. any introductory fixed-rate
                      expires on an ARM, an interest-only loan becomes
                      fully-amortizing, or a loan with negative amortization
                      features becomes fully-amortizing); and

                    o The remaining loan amount, which is:

                              For a non-standard ARM, the outstanding
                               principal balance as of the date of the recast,
                               assuming all scheduled payments have been
                               made up to the recast date and the payment
                               due date on the recast date is made and
                               credited as of that date;

                              For a non-standard mortgage with interest-
                               only features, the loan amount, assuming all
                               scheduled payments have been made up to
                               the recast date and the payment due date on
                               the recast date is made and credited as of that
                               date;

                              For a non-standard mortgage with negative
                               amortization features, the ―maximum loan
                               amount‖ (see below).

                 Standard mortgage payment calculation: The payment
                 calculation for a standard mortgage replacing a non-
                 standard mortgage must be made based on substantially
                 equal, fully amortizing payments based on the maximum
                 interest rate that may apply during the first five years after
                 consummation.

o ―Fully indexed rate‖ means the interest rate calculated using the index or
  formula (e.g., 3-month U.S. dollar LIBOR plus 2%) at the times of
  consummation and the maximum margin that can apply at any time
  during the loan (but not taking into account any discounted or premium
  rate, such as when an ARM contains an initial rate that is higher or lower
  than what the rate would be using the applicable index or formula);

         For step-rate or fixed-rate mortgages that do not vary based on an
          index or formula (i.e. there is no ―fully indexed rate‖) the creditor
          must use the maximum interest rate that may apply at any time
          during the loan term.

o ―Higher-priced covered transaction‖ means a mortgage secured by a
  dwelling that does not meet one of section 226.43‘s exemptions that:

                                                                                  22
                        Exceeds the average prime offer rate (APOR)10 for a ―comparable
                         transaction‖ by 1.5% or more for a first-lien mortgage; or

                        Exceeds the APOR by 3.5% or more for a subordinate lien
                         mortgage.

             o ―Maximum loan amount‖ means the loan amount plus any increase in
               principal resulting from negative amortization, assuming:

                        The consumer only make minimum periodic payments for the
                         maximum possible time (i.e. until the terms of the loan require the
                         consumer to make fully amortizing payments); and

                        The maximum interest rate is reached at the earliest possible time.

                                 For ARMs with negative amortization, the creditor must
                                 assume that the interest rate will increase as rapidly as
                                 possible after closing, taking into account any applicable
                                 rate caps; for such ARMs without a rate cap, the creditor
                                 must assume that the interest rate increases to the
                                 maximum lifetime interest rate at the first adjustment.

             o ―Mortgage-related obligation‖ means:

                        Property taxes;

                        Private mortgage insurance premiums and similar mortgage-
                         related insurance premiums required by the creditor (but not
                         including premiums for mortgage-related insurance that the
                         creditor does not require, such as earthquake insurance or credit
                         insurance, or fees for optional debt suspension and debt
                         cancellation agreements);

                        Homeowner‘s association, condo, or housing cooperative fees;

                        ―Ground rent‖ or leasehold payments; and

                        Special assessments.

Higher-Priced Closed-End Home Mortgage Requirements (12 C.F.R. § 226.32):

        Definition of Higher-Priced Mortgages: These requirements generally apply to
        certain mortgage loans in which either: (1) the APR exceeds the rate on Treasury
        securities of similar duration (a) by more than 8% for first lien loans or (b) by
        more than 10% for subordinate loans, or (2) the total points and fees payable by
10
  The APOR is currently calculated by the Federal Financial Institutions Examination Council (FFIEC),
and is available on the FFIEC‘s website here. APOR is calculated relative to the average rates on
various classes of mortgages and is not related to the ―prime rate‖ published by the Wall Street Journal.

                                                                                                        23
        the consumer will exceed the greater of 8% of the loan amount or the sum of
        $592 (for 2011).11

        Revision of “Points and Fees” Definition: The proposal would revise the
        definition of ―points and fees‖ for higher-cost mortgage to have the same
        meaning as ―points and fees‖ for ―qualified mortgages.‖ As proposed, ―points and
        fees‖ would include:

            o All items considered a ―finance charge‖12 other than:

                        Interest or the time-price differential, or

                        Any mortgage insurance or other guarantee protecting the creditor
                         against the consumer‘s default or other credit loss so long as the
                         charge is:

                                 Part of a federal or state program (e.g., Federal Housing
                                 Administration (FHA)),

                                 Is equal or less than the amount payable for an FHA
                                 guarantee so long as the premium is refundable on a pro
                                 rata basis and the refund is automatically issued upon
                                 notification that the underlying mortgage is paid off, or

                                 Premiums or other charges payable after closing;

            o All compensation paid directly or indirectly by a consumer or a creditor to
              a ―loan originator,‖13 including a ―loan originator‖ that is also the creditor in
              a ―table-funded transaction‖ (i.e. if a mortgage broker processes and
              closes a loan in his or her own name but, at or about the time of
11
   The Fed is not proposing at this time to implement the Dodd-Frank Act‘s definition of ―higher-priced‖
mortgage, which would include a mortgage for which ―the total points and fees payable in connection with
the transaction, other than bona fide third party charges not retained by the mortgage originator, creditor,
or an affiliate of the creditor or mortgage originator, exceed—(I) in the case of a transaction for $20,000 or
more, 5 percent of the total transaction amount; or (II) in the case of a transaction for less than $20,000,
the lesser of 8 percent of the total transaction amount or $1,000 (or such other dollar amount as the
Board shall prescribe by regulation.)‖ The Fed or CFPB will likely propose an additional rule in the future
to implement the Dodd-Frank definition of higher-priced mortgage.
12
   ―The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable
directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or
a condition of the extension of credit. It does not include any charge of a type payable in a comparable
cash transaction.‖ 12 C.F.R. § 226.4(a) (―Finance Charge‖).
13
   “Loan originator. For purposes of this section, the term ‗loan originator‘ means with respect to a
particular transaction, a person who for compensation or other monetary gain, or in expectation of
compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of
consumer credit for another person. The term ‗loan originator‘ includes an employee of the creditor if the
employee meets this definition. The term ‗loan originator‘ includes the creditor only if the creditor does not
provide the funds for the transaction at consummation out of the creditor's own resources, including
drawing on a bona fide warehouse line of credit, or out of deposits held by the creditor.‖ 12 C.F.R. §
226.36(a)(1).

                                                                                                           24
                 settlement, the mortgage broker transfers the loan to the lender, and the
                 lender simultaneously advances the monies to fund the loan); examples
                 include bonuses, commissions, yield spread premiums, awards of
                 merchandise, services, trips, or similar prizes, or hourly pay for the actual
                 number of hours worked on a particular transaction (including as part of a
                 periodic bonus, commission, gift, etc., if a portion of it can be connected to
                 the loan in question, regardless of what the fee is called);

            o ―Real estate related fees‖14 (other than amounts escrowed for future
              payment of taxes) unless:

                        The charge is reasonable,

                        The creditor receives no direct or indirect compensation in
                         connection with the charge (e.g., a creditor would receive
                         compensation for an appraisal performed by its own employee; this
                         would need to be included in ―points and fees‖ even if it would be
                         excluded from the finance charge as a bona fide charge in a
                         reasonable amount), and

                        The charge is not paid to an affiliate of the creditor;

            o Premiums or other charges payable at or before closing for credit life,
              credit disability, credit unemployment, or credit property insurance (e.g.,
              single premium credit insurance), or any similar type of insurance or debt
              cancellation contact (except as noted above with respect to FHA and
              similar programs, etc.) but not including homeowner‘s insurance;

            o The maximum prepayment penalty that could be charged or collected
              under the terms of the loan (Note: proposed 12 C.F.R. §
              226.43(b)(10)(i)(A) would define prepayment penalty to include situations
              that NCUA has determined are not prepayment penalties within the
              meaning of the Federal Credit Union Act, such as a credit union recouping
              costs, such as closing costs, that it paid on the borrower‘s behalf); and

            o The total prepayment penalty that would be charged if the consumer
              refinanced the loan with the institution that is the current holder of the
              mortgage loan (or a servicer or affiliate working on behalf of that
              institution).

        Not Included in “Points and Fees:” The definition of ―points and fees‖ does
        not include compensation paid to:

14
    ―Real-estate related fees. The following fees in a transaction secured by real property or in a residential
mortgage transaction, if the fees are bona fide and reasonable in amount:
(i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or
settlement documents.‖ 12 C.F.R. § 226.4(c)(7).

                                                                                                            25
         o Employees of manufactured home retailers who assists a consumer in
           applying for a residential mortgage loan but does not take the application,
           offer or negotiate the terms of the loan, or advise the consumer on loan
           terms;

         o Licensed or registered real estate brokers unless the real estate broker is
           compensated by the creditor or loan originator (or by an agent thereof); or

         o Servicers (or their employees, agents, or contractors) involved in loan
           modifications or the refinancing of loans that are in default or have a
           reasonable likelihood of being in default.

Record Retention (12 C.F.R. § 226.25):

      “Minimum Standards” Record Retention: Creditors would generally be
      required to retain evidence of compliance with the proposed section 226.43
      (―Minimum Standards for Transactions Secured by a Dwelling‖) rules for at least
      3 years after closing on a transaction involving a mortgage on a dwelling (i.e. a
      residential structure of 1-4 units whether or not it is attached to real property).
      See also the summary of proposed section 226.43. Evidence may be retained
      by any method that accurately produces records (including computer programs,
      and—unless otherwise required—the creditor only needs to retain enough
      information to reconstruct the required disclosures or other records (such as with
      respect to account statements).

      Other Record Retention Requirements: Creditors would generally need to
      retain evidence of compliance with all other sections of these rules (other than
      the advertising requirements) for at least 2 years after the date ―disclosures are
      required to be made or action is required to be taken.‖ Agencies responsible for
      enforcing these rules (such as NCUA), however, would have the option to require
      credit unions to keep these records for longer periods of time. Although creditors
      do not need to retain actual paper copies of the documentation used in
      underwriting the transaction, the creditor needs to be able to accurately
      reproduce such records (e.g., if a creditor relies on an IRS W-2 form, the creditor
      should be able to reproduce the W-2 form itself, such as via a scanned electronic
      copy, not just the information from the W-2 form).

         o Prepayment Penalties: If a covered transaction has a prepayment
           penalty, the creditor must maintain records that document that the creditor
           offered, as an alternative, a covered mortgage product without a
           prepayment penalty (however, this does not apply if the consumer actually
           received a mortgage without a prepayment penalty even if one with a
           prepayment penalty was offered). If a creditor offers a mortgage with a
           prepayment penalty through a mortgage broker, the creditor must retain
           records of the alternative transaction offered by the mortgage broker (as
           defined above), such as the broker‘s rate sheet and the creditor‘s
           agreement with the broker.

                                                                                       26
Removal of Redundant Higher-Cost Mortgage “Repayment Ability” Requirement:
The proposal would remove the prohibition on not considering a borrower‘s repayment
ability in connection with a ―higher-cost‖ mortgage found in 12 C.F.R. § 226.34(a)(4)
because this would be redundant with this rule if it is finalized as proposed.

Removal of “Prohibited acts or practices in connection with higher-priced
mortgage loans:” The proposal would remove the existing 12 C.F.R. § 226.35
(―Prohibited acts or practices in connection with higher-priced mortgage loans.‖)
because this would be redundant with this rule‘s requirements if it is finalized as
proposed.

Questions to Consider Regarding the Proposed Rule (Issues for which the Fed
has Specifically Requested Comment):

Proposed “Alternative” Approaches: Which of the various ―Alternative‖ approaches
proposed by the Fed (i.e. ―Alternative 1‖ versus ―Alternative 2‖) do you prefer and why?

“Circumvention and Evasion:” The Board seeks comment on the extent to which the
proposed anti-evasion rule could have this consequence, and solicits suggestions for a
more narrowly tailored rule. For example, the primary concern would appear to be with
HELOCs that are substituted for closed-end home purchase loans and refinancings,
which are usually first-lien loans, rather than with HELOCs taken for home improvement
or other consumer purposes. The Board seeks comment on whether it should limit an
anti-evasion rule to HELOCs secured by first liens where the consumer draws down all
or most of the entire line of credit immediately after the account is opened, and whether
such a rule would be effective in preventing evasion.

“Loan Originators:” The Board solicits comment on the proposal not to include in the
definition of ‗‗loan originator‘‘ a ‗‗person who represents to the public, through
advertising or other means of communicating or providing information (including the use
of business cards, stationery, brochures, signs, rate lists, or other promotional items),
that such person can or will provide‘‘ the services of a loan originator.

Indexes Used for ARMs: Given the increasing relevance of market indices, the Board
solicits comment on whether loan products currently exist that base the interest rate on
a specific index at consummation (e.g., U.S. prime), but then base subsequent rate
adjustments on a different index (e.g., LIBOR), and whether further guidance
addressing how to calculate the fully indexed rate for such loan products is needed.

“Recast:” The Board solicits comment on the proposed definition of ‗‗recast‘‘ for
purposes of proposed § 226.43(c) and (d). (―The term ‗recast‘ means, for an adjustable-
rate mortgage, the expiration of the period during which payments based on the
introductory fixed rate are permitted; for an interest-only loan, the expiration of the
period during which the interest only payments are permitted; and, for a negative
amortization loan, the expiration of the period during which negatively amortizing
payments are permitted.‖)


                                                                                      27
“Simultaneous Loans” and HELOCs: The Board solicits comment on whether it
should narrow the requirement to consider simultaneous loans that are HELOCs to
apply only to purchase transactions.

Verification of Military Employment: The Board solicits comment on whether
additional flexibility in verifying the employment status of military personnel is necessary
to facilitate compliance and whether the Official Staff Commentary also should state that
creditors may verify the employment status of a member of the military using a Leave
and Earnings Statement.

 “Mortgage-Related Obligations:” The Board solicits comment on any special
concerns regarding the requirement to document certain mortgage-related obligations,
such as for ground rent or leasehold payments, or special assessments. The Board also
solicits comment on whether it should provide, by way of example, that the HUD–1 or
1A, or a successor form, can serve as verification of certain mortgage-related
obligations reflected therein (e.g., title insurance), where a legal obligation exists to
complete the HUD–1 or 1A accurately.

Verification of Third-Party Records:

       Based on outreach, the Board believes it is feasible for creditors to obtain copies
       of promissory notes or other written verification from third-party creditors, but
       solicits comment on other examples the Board could provide to facilitate
       creditors‘ compliance with the proposed verification requirement with respect to
       simultaneous loans.

       To verify current debt obligations as required by proposed § 226.43, a creditor
       would be permitted, for instance, look to credit reports, student loan statements,
       automobile loan statements, credit card statements, alimony or child support
       court orders, and existing mortgage statements. This approach would parallel the
       2008 HOEPA Final Rule‘s model for consideration and verification of income and
       would preserve flexibility for creditors. The Board solicits comment on this
       approach, and on whether more specific guidance should be provided.

       The Board solicits comment on the feasibility of requiring creditors independently
       to verify current debt obligations not reflected in the credit report that a consumer
       has listed on the application.

       Credit History: The proposed Official Staff Commentary clarifies that creditors
       may look to widely accepted governmental and nongovernmental underwriting
       standards to define and verify ‗‗credit history.‘‘ For example, a creditor may
       consider factors such as the number and age of credit lines, payment history,
       and any judgments, collections, or bankruptcies. To verify credit history as
       required by proposed § 226.43, a creditor may, for instance, look to credit reports
       from credit bureaus, or other nontraditional credit references contained in third-
       party documents, such as rental payment history or public utility payments. The
       Board solicits comment on this approach.

                                                                                          28
      Documents Prepared by the Consumer: The Board solicits comment on
      whether any documents or records prepared by the consumer and not reviewed
      by a third party appropriately can be considered in determining repayment ability,
      for example, because a particular record provides information not obtainable
      using third-party records. In particular, the Board solicits comment on methods
      currently used to ensure that documents prepared by self-employed consumers
      (such as a year-to-date profit and loss statement for the period after the period
      covered by the consumer‘s latest income tax return, or an operating income
      statement prepared by a consumer whose income includes rental income) are
      reasonably reliable for use in determining repayment ability.

Ability to Repay Determination:

      The Board generally solicits comment on its proposed approach to the Ability-to-
      Repay Determination. In addition, the Board specifically solicits comment on
      whether, consistent with the Board‘s 2008 HOEPA Final Rule, the Board should
      provide an affirmative defense for a creditor that can show that the amounts of
      the consumer‘s income or assets relied upon in determining the consumer‘s
      repayment ability were not materially greater than the amounts the creditor could
      have verified using third-party records at or before consummation.

      Using a “Monthly” Payment for Ability to Repay Calculation for Mortgages
      Paid Quarterly or Biweekly, etc.: The Board solicits comment on operational
      difficulties creditors may encounter when complying with this ‗‗monthly‘‘
      requirement, and whether additional guidance is necessary.

      “Substantially Equal Payments:” The Board solicits comment on operational
      difficulties that arise by ensuring payment amounts meet the ‗‗substantially
      equal‘‘ condition. The Board also solicits comment on whether a 1% variance is
      an appropriate tolerance threshold.

      The Board solicits comment on whether it should exercise its authority to provide
      that the creditor may calculate the monthly payment using the fully indexed rate
      based on the outstanding principal balance as of the date the fully indexed rate
      takes effect under the loan‘s terms, instead of the loan amount at consummation.

      The Board solicits comment on whether it should exercise its authority to provide
      a safe harbor for creditors that use the largest scheduled payment that can occur
      during the loan term to determine the consumer‘s ability to repay.

      The Board solicits comment on whether it should provide additional guidance on
      considering debt obligations that are almost paid off. For example, some
      underwriting standards limit the consideration of current debt obligations to
      recurring obligations extending 10 months or more, and recurring obligations
      extending less than 12 months if they affect the consumer‘s repayment ability in
      the months immediately after consummation.


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      The Board solicits comment on whether it should provide additional guidance on
      considering debt obligations that are in forbearance or deferral. For example,
      some underwriting standards do not include consideration of projected
      obligations deferred for at least 12 months, in particular student loans.

      The Board solicits comment on whether it should provide guidance on
      consideration and verification of current debt obligations for joint applicants. The
      Board also solicits comment on whether the guidance should differ for non-
      occupant joint applicants and occupant joint applicants.

Higher-Priced Mortgage Loan Definition:

      Balloon Mortgages: Although the purpose differs, the Board similarly
      recognizes that the use of the term annual percentage rate in ‗‗higher-priced
      covered transaction‘‘ means that the scope of balloon loans that may exceed the
      applicable loan pricing thresholds will likely be greater. The Board is concerned
      that using an over inclusive metric to compare to the average prime offer rate
      may cover some prime loans and unnecessarily limit credit access to these loan
      products, contrary to statutory intent. For these reasons and also for consistency,
      the Board solicits comment on whether it should exercise its authority to replace
      ‗‗annual percentage rate‘‘ with ‗‗transaction coverage rate‘‘ as the loan pricing
      benchmark for higher-priced covered transactions.

      “Jumbo” Mortgages: The Board notes that ‗‗jumbo‘‘ loans typically carry a
      premium interest rate to reflect the increased credit risk of such loans. These
      loans are more likely to exceed the average prime offer rate coverage threshold
      and be considered higher-priced covered transactions. Accordingly, under this
      proposal creditors would have to underwrite such loans using the scheduled
      payments, including any balloon payment, regardless of the loan term. The
      Board is concerned that this approach may unnecessarily restrict credit access
      and choice in the ‗‗jumbo‘‘ balloon loan market. Thus, the Board solicits comment
      on whether it should exercise its authority to incorporate the special, separate
      coverage threshold of 2.5 percentage points in the proposed definition of ‗‗higher-
      priced covered transaction‘‘ to permit more ‗‗jumbo‘‘ balloon loans that have
      ‗‗prime‘‘ loan pricing to benefit from the special payment calculation rule set forth
      for balloon loans.

      Second Homes and Other “Non-Principal Dwellings:” The Board solicits
      comment, and supporting data, on whether it should exercise its authority to
      incorporate a special, separate coverage threshold in the proposed definition of
      ‗‗higher-priced covered transaction‘‘ for loans secured by non-principal dwellings,
      and what rate threshold would be appropriate for such loans.




                                                                                        30
Points and Fees, etc.:

      Total Loan Amount Definition: The Board requests comment on the proposed
      revisions to the comment explaining how to calculate the ‗‗total loan amount,‘‘
      including whether additional guidance is needed.

      The Board requests comment on whether to streamline the calculation to better
      ensure that the ‗‗total loan amount‘‘ includes all credit extended other than
      financed points and fees. Specifically, the Board solicits comment on whether to
      revise the calculation of ‗‗total loan amount‘‘ to be the following: ‗‗principal loan
      amount‘‘, minus charges that are points and fees under § 226.32 and are
      financed by the creditor. The purpose of using the ‗‗principal loan amount‘‘
      instead of the ‗‗amount financed‘‘ would be to streamline the calculation to
      facilitate compliance and to ensure that no charges other than financed points
      and fees are excluded from the ‗‗total loan amount.‘‘

      The Board is proposing two alternatives for implementing the limits on points and
      fees for qualified mortgages. Alternative 1 is based on certain tiers of loan
      amounts (e.g., a points and fees threshold of 3.5 percent of the total loan amount
      for a loan amount greater than or equal to $60,000 but less than $75,000).
      Alternative 1 is designed to be an easier calculation for creditors, but may result
      in some anomalies (e.g., a points and fees threshold of $2,250 for a $75,000
      loan, but a points and fees threshold of $2,450 for a $70,000 loan). Alternative 2
      is designed to remedy these anomalies by providing a more precise sliding scale,
      but may be cumbersome for some creditors. The proposal solicits comment on
      these approaches.

      The Board requests comment on the proposal to exclude from ‗‗points and fees‘‘
      upfront premiums as well as charges for any insurance or guaranty under a
      Federal or state government program.

      The Board requests comment on whether any reason exists to include the
      phrase ‗‗from any source‘‘ to describe loan originator compensation.

      The Board requests comment on the proposal regarding the types of loan
      originator compensation that must be included in points and fees, including the
      appropriateness of specific examples given in the commentary.

      The Board requests comment on the proposal not to exclude from the points and
      fees calculation for qualified mortgages fees paid to creditor-affiliated settlement
      services providers. The Board invites commenters favoring this exclusion to
      explain why excluding these fees from the points and fees calculation would be
      consistent with the purposes of the statute.

      Regarding the mortgage loan transaction costs that are deemed points and fees,
      the Board requests comment on whether any other types of fees should be
      included in points and fees only if they are ‗‗payable at or before closing.‘‘ The

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Board is concerned that some fees that occur after closing, such as fees to
modify a loan, might be deemed to be points and fees. If so, calculating the
points and fees to determine whether a transaction is a qualified mortgage may
be difficult because the amount of future fees (e.g., loan modification fees)
cannot be known prior to closing. Creditors might be exposed to excessive
litigation risk if consumers were able at any point during the life of a mortgage to
argue that the points and fees for the loan exceed the qualified mortgage limits
due to fees imposed after loan closing.

The Board requests comment on the proposal to implement the statutory
provision that includes upfront premiums and charges for credit insurance and
debt cancellation and suspension coverage in the definition of ‗‗points and fees.‘‘

The Board requests comment on the proposal to incorporate into the definition of
‗‗points and fees‘‘ the prepayment penalty provisions and solicits comment in
particular on whether additional guidance is needed to facilitate compliance with
these provisions.

The Board requests comment on the proposed exemptions from the definition of
‗‗points and fees‘‘ for compensation paid to certain persons not considered
‗‗mortgage originators‘‘ under the Dodd-Frank Act.

Proposed Loan Sizes for Points and Fees as a Percentage of Loan Value:
The Board requests comment on the proposed alternative loan size ranges and
corresponding points and fees caps for qualified mortgages. The Board
encourages commenters to provide specific data to support their
recommendations. The Board also solicits comment on whether the proposal
should index the loan size ranges for inflation and periodically change them by
regulation. In addition, the Board requests comment on the potential impact of
the proposal on access to credit, particularly on how the impact may vary based
on geographic area.

Proposed Points and Fees Formula: The Board recognizes that a formula is
potentially more complex for creditors to comply with than the multiple tiers
proposed under the first alternative. In particular, the Board requests comment
on whether a formula would be difficult for smaller creditors to integrate into their
lending operations.

The Board requests comment on whether and on what basis the final rule should
exclude from points and fees for qualified mortgages points charged to meet risk-
based price adjustment requirements of secondary market purchasers and points
charged to offset loan-level risks on mortgages held in portfolio.

Concerns have been raised that small creditors such as community banks that
often hold loans in portfolio rather than sell them on the secondary market may
have difficulty complying with this requirement. The Board requests comment on
whether any exemptions from the requirement that the interest rate reduction

                                                                                   32
     purchased by a ‗‗bona fide discount point‘‘ be tied to secondary market factors
     are appropriate.

     The Board requests comment on whether special rules should be created to
     permit certain reverse mortgages to have prepayment penalties. In particular, the
     Board requests comment on how applying such conditions would be consistent
     with the purposes of the alternative requirements for qualified mortgages. The
     Board also requests comment and any supporting data on the prepayment rates
     for reverse mortgages.

Prepayment Penalties:

     The Board requests comment on the proposal to incorporate prepayment
     penalties into the definition of ‗‗points and fees‘‘ and solicits comment in particular
     on whether additional guidance is needed to facilitate compliance with these
     provisions.

     The Board solicits comment on whether or not it is appropriate to include
     ‗‗interest‘‘ charged for a period after prepayment, or fees waived unless the
     consumer prepays, in the definition of ‗‗prepayment penalty.‖ Specifically, the
     Board requests comment on the possible effects of including those charges on
     the availability of particular types of covered transactions.

Bridge Loans & Certain Balloon Payment Mortgages:

     The Board solicits comment on whether or not renewal loan terms should be
     considered under proposed § 226.43. In particular, the Board requests comment
     on whether the proposed exclusion should be limited to certain types of
     temporary or ‗‗bridge‘‘ loans, such as loans to finance the initial construction of a
     dwelling, or should not apply for certain types of temporary or ‗‗bridge‘‘ loans,
     such as balloon-payment loans.

     The proposed rule would apply to ‗‗non-prime‘‘ loans with a balloon payment
     regardless of the length of the term or any contract provision that provides for an
     unconditional guarantee to renew. The Board is concerned that this approach
     could lessen credit choice for non-prime borrowers, restrict credit availability and
     negatively impact competition for this credit market. Accordingly, the Board
     solicits comment, with supporting data, on the impact of this approach for low-to-
     moderate income borrowers. In addition, under proposed § 226.43, the creditor
     would be required to determine that the consumer has a reasonable ability to
     repay the loan, including the balloon payment, from current or reasonably
     expected income or assets other than the value of the dwelling. As a result, the
     creditor would not be able to consider the consumer‘s ability to refinance the loan
     in order to pay, or avoid, the balloon payment. The Board requests comment on
     this approach.



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     The Board solicits comment on whether further guidance regarding treatment of
     loans that provide for multiple disbursements, such as construction-to-permanent
     loans that are treated as a single transaction, is needed.

     The Board solicits comment on the meaning of the phrase ‗‗more rapid
     repayment‘‘ and what loan products should be covered by this phrase. For
     example, the Board solicits comment on whether the phrase ‗‗more rapid
     repayment‘‘ should include any loan where the payments of principal and interest
     are based on an amortization period that is shorter than the term of the loan
     during which scheduled payments are permitted.

Refinancing “Non-Standard Mortgages” into “Standard Mortgages:”

     The Board requests comment on whether the proposed rule could be structured
     differently to better ensure that the creditor on a refinancing under § 226.43(d)
     retains an interest in the performance of the new loan and whether additional
     guidance is needed.

     The Board requests comment on whether a requirement that the payment on the
     standard mortgage must be ‗‗materially lower‘‘ than the payment on the non-
     standard mortgage and whether a 10 percent reduction or some other
     percentage or dollar amount would be a more appropriate safe harbor for
     compliance with this requirement. The Board also requests comment on whether
     a percentage or dollar amount reduction would be more appropriate a rule rather
     than a safe harbor.

     The Board recognizes that a consumer may not realize that a loan will be recast
     until the recast occurs and that, at that point, the consumer could not refinance
     the loan under the special streamlined refinancing provisions of proposed §
     226.43(d). The Board requests comment on whether to use its legal authority to
     make adjustments to TILA to permit streamlined refinancings even after a loan is
     recast.

     The Board requests comment on whether the delinquencies that creditors are
     required to consider under § 226.43 should be late payments of more than 30
     days as proposed, 30 days or more, or some other time period.

     Thus the Board solicits comment on whether to use its legal authority to include
     balloon mortgages in the definition of ‗‗non-standard mortgage‘‘ for purposes of
     the special refinancing provisions. The Board also requests comment generally
     on the appropriateness of the proposed definition of ‗‗non-standard mortgage.‘‘

     The Board requests comment on the proposal to apply the same limit on the
     points and fees that may be charged for a ‗‗qualified mortgage‘‘ under § to the
     points and fees that may be charged on a ‗‗standard mortgage.‖



                                                                                       34
The Board solicits comment on whether there are any ‗‗high-cost areas‘‘ in which
loan terms in excess of 30 years are necessary to ensure that responsible,
affordable credit is available and, if so, how they should be identified for
purposes of such an exception. The Board also seeks comment on whether any
other exceptions would be appropriate.

The Board requests comment on the proposal to allow a standard mortgage to
have a loan term of up to 40 years.

The Board requests comment on the proposal to require that a standard
mortgage under proposed § 226.43 have an interest rate that is fixed for at least
the first five years after consummation, including on whether the rate should be
required to be fixed for a shorter or longer period and data to support any
alternative time period. In addition, the Board requests comment on whether a
balloon mortgage of at least five years should be considered a ‗‗standard
mortgage‘‘ under the streamlined refinancing provisions of § 226.43.

This proposal is intended to ensure that the consumer does not incur additional
home mortgage debt as part of a refinance designed to prevent the consumer
from defaulting on an existing home mortgage. The Board believes that
permitting the consumer to lose additional equity in his or her home under TILA‘s
special refinancing provisions would undermine the financial stability of the
consumer, thus contravening the purposes of the statute. The Board requests
comment, however, on whether some de minimis amount of cash to the
consumer should be permitted, either because this allowance would be
operationally necessary to cover transaction costs or for other reasons, such as
to reimburse a consumer for closing costs that were over-estimated but financed.

The Board requests comment on whether the meaning of ‗‗refinancing‘‘ in §
226.43 should be expanded to include a broader range of transactions, or
otherwise should be defined differently or explained more fully than proposed.

The Board requests comment on the proposal to exempt creditors of refinances
that meet the conditions under proposed § 226.43 from the income and asset
verification requirements and the payment calculation requirements of the
general ability-to-repay rules in proposed § 226.43. The Board solicits comment
on whether an exemption from other ability to repay requirements under
proposed § 226.43, such as consideration of credit history under proposed §
226.43, may also be appropriate.

The proposal does require that a creditor have ‗‗documented underwriting
practices‘‘ to support the creditor‘s offer of rate discounts and loan terms. In this
way, the proposal is intended to promote transparency for examiners and
consumers in understanding the basis for any special discounts or terms that the
creditor offers to borrowers refinancing their home mortgages under proposed §
226.43. In addition, the Board recognizes that state or Federal laws may regulate
the rates and terms offered to consumers depending on various consumer

                                                                                  35
      characteristics or other factors. For this reason, the Board proposes that the
      rates and terms offered to consumers under § 226.43(d) not be prohibited by
      other applicable state or Federal law. The Board requests comment on this
      proposed interpretation and whether additional guidance on the meaning of
      proposed § 226.43 is needed.

      The Board requests comment on the proposed payment calculation for a
      nonstandard mortgage and on the appropriateness and usefulness of the
      proposed payment calculation examples.

      The Board requests comment on the proposed payment calculation for a
      standard mortgage.

      Quantitative standards. The Board is not proposing a quantitative standard for
      the debt-to-income ratio or residual income in the qualified mortgage definition for
      several reasons. If the Board were to adopt a quantitative standard, the Board
      seeks comment on what exceptions may be necessary for low-income borrowers
      or borrowers living in high-cost areas, or for other cases.

      The Board solicits comment on how to address any issues that may arise in
      connection with homeowners‘ association transfer fees and costs associated with
      loans for energy-efficient improvement.

„„Operates Predominantly in Rural or Underserved Areas‟‟

      To qualify for the exception, a creditor must ‗‗operate predominantly in rural or
      underserved areas.‘‘ To implement this provision, proposed § 226.43 provides
      that, during the preceding calendar year, a creditor must have made more than
      50% of its total balloon-payment loans in counties designated by the Board as
      ‗‗rural or underserved.‘‘ The Board solicits comment on the appropriateness of
      both of the county-based approach and the 50% of balloon-payment loans
      approach to implement the phrase, ‗‗operates predominantly.‘‘

      „„Rural:‟‟ The Board is proposing to limit the definition of ‗‗rural‘‘ areas to those
      areas most likely to have only limited sources of credit (as opposed to, for
      example, NCUA‘s more expansive definition of ―rural district‖). The Board seeks
      comment on all aspects of its approach to designating ‗‗rural‘‘ counties, including
      whether the definition should be broader or narrower, as well as whether the
      designation should be based on information other than the ERS urban influence
      codes.

      „„Underserved:‟‟ The Board is proposing to do so by designating as
      ‗‗underserved‘‘ only those areas where the withdrawal of a creditor from the
      market could leave no meaningful competition for consumers‘ mortgage
      business. (NCUA‘s definition of ―underserved area‖ is significantly more
      expansive than the Fed‘s proposed definition of ―underserved.‖) The Board
      seeks comment on the appropriateness of both the proposed use of two or fewer

                                                                                          36
existing competitors to delineate areas that are ‗‗underserved‘‘ and the proposed
use of five or more covered transaction originations to identify competitors with a
significant presence in a market.

The Board solicits comment on the relative merits of Alternative 1 (i.e. a
maximum, aggregate dollar amount of exempted balloon payment mortgages per
year) and Alternative 2 (i.e. a maximum number of exempted balloon payment
mortgages per year) regarding the exemption for certain creditors offering
balloon payment mortgages in underserved and rural areas (as described
above).

The Board also seeks comment on whether, under either alternative, some de
minimis number of transfers that may be made without losing eligibility for the
exception, such as two per calendar year, would be appropriate.

The Board seeks comment on whether there are any other situations in which
creditors should be permitted to transfer balloon-payment loans without
becoming ineligible for the exception, such as troubled institutions that need to
raise capital by selling assets or institutions that enter into mergers or
acquisitions.

The Board seeks comment on the appropriateness of the proposed $2 billion
asset-size threshold and of the proposed annual adjustments thereto.




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