Four Compliance Options

First, 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.

Considering and verifying the following eight underwriting factors:

• Income or assets relied upon in making the ability-to-repay determination

• Current employment status

• The monthly payment on the mortgage

• The monthly payment on any simultaneous mortgage

• The monthly payment for mortgage-related obligations

• Current debt obligations

• The monthly debt-to-income ratio, or residual income

• Credit history

Additionally, the underwriting of the payment for an adjustable-rate mortgage would be based on the fully indexed rate.

Second, 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 FRB seeks comments on two alternative approaches for defining a "qualified mortgage."

Two alternative definitions of a "qualified mortgage."

Alternative 1

Alternative 1 would operate as a legal safe harbor and define a "qualified mortgage" as a mortgage for which:

• The loan does not contain negative amortization, interest-only payments, or a balloon payment, or a loan term exceeding 30 years;

• The total points and fees do not exceed 3 percent of the total loan amount;

• The income or assets relied upon in making the ability-to-repay determination are considered and verified; and

• The underwriting of the mortgage (1) is based on the maximum interest rate that may apply in the first five years, (2) uses a payment scheduled that fully amortizes the loan over the loan term, and (3) takes into account any mortgage-related obligations.

Alternative 2

Alternative 2 would provide a rebuttable presumption of compliance and would define a "qualified mortgage" as including the criteria listed under Alternative 1 as well as additional underwriting requirements from the general ability-to-repay standard.

The creditor would also have to consider and verify:

• The consumer's employment status,

• The monthly payment for any simultaneous mortgage,

• The consumer's current debt obligations,

• The monthly debt-to-income ratio or residual income, and

• The consumer's credit history.

Third, a creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage. This option is meant to preserve access to credit for consumers located in rural or underserved areas where banks originate balloon loans to hedge against interest rate risk for loans held in portfolio.

Under this option, a creditor can make a balloon-payment qualified mortgage with a loan term of five years or more by:

• Complying with the requirements for a qualified mortgage; and

• Underwriting the mortgage based on the scheduled payment, except for the balloon payment.

• Refinancing the consumer into a "standard mortgage" that has limits on loan fees and that does not contain certain features such as negative amortization, interest-only payments, or a balloon payment;

• Considering and verifying the underwriting factors listed in the general ability-to-repay standard, except the requirement to consider and verify the consumer's income or assets; and

• Underwriting the "standard mortgage" based on the maximum interest rate that can apply in the first five years.

• Implement the Dodd-Frank Act's limits on prepayment penalties

• Lengthen the time creditors must retain records that evidence compliance with the ability-to-repay and prepayment penalty provisions

• Prohibit evasion of the rule by structuring a closed-end extension of credit as an open-end plan