Mortgage Origination Standards
The Federal Reserve Board has requested input on a proposed rule under Regulation Z (Truth in Lending) that would require creditors to determine a consumer’s ability to repay a mortgage before making the loan. The rule also would establish minimum mortgage underwriting standards. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the revisions.
The proposed requirements would apply to all consumer mortgages (except home equity lines of credit, time-share plans, reverse mortgages, or temporary loans), and would provide four options to comply with the ability-to-repay requirement:
1. A creditor can meet the general ability-to-repay standard by considering and verifying specified underwriting factors, such as the consumer’s income or assets.
2. A creditor can make a “qualified mortgage,” which provides the creditor with special protection from liability provided the loan does not have certain features, such as negative amortization; the fees are within specified limits; and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years. The Fed is soliciting comment on two alternative approaches for defining a “qualified mortgage.”
3. A creditor operating predominantly in rural or underserved areas can make a balloon payment qualified mortgage. This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors originate balloon loans to hedge against interest-rate risk for loans held in portfolio.
4. Acreditor can refinance a “nonstandard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment. This option is meant to preserve access to streamlined refinancings.
The proposal would also implement the Dodd-Frank Act’s limits on prepayment penalties. The Fed is soliciting comment on the proposed rule until July 22, 2011. General rule-making authority for the Truth in Lending Act is scheduled to transfer to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011. So, the final rule will come from the CFPB rather than the Fed.
Register MLOs By July 29
On Jan. 31, 2011, NCUA and the federal banking agencies announced that the Nationwide Mortgage Licensing System & Registry (NMLS) would begin accepting federal registrations from credit unions and banks that offer residential mortgage loans as required by the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act).
Credit unions and their residential mortgage loan originators (MLOs) have until July 29, 2011, to complete initial registration on the new system. Remember that a mortgage loan originator under the SAFE Act is any employee who:
* Takes a residential mortgage loan application; and
* Offers or negotiates terms of a residential mortgage loan for compensation or gain.
After July 29, any MLO who hasn’t yet registered on the NMLS will be prohibited from originating residential mortgage loans without first meeting these requirements.
The NMLS website has a number of resources to help institutions and their MLOs with the registration process, including:
* Guides for financial institutions and MLOs to get started;
* Frequently asked questions; and
* Training workshops and online webinars.
Find all of these materials on the NMLS resource page at mortgage.nationwidelicensingsystem.org.