Secondary market experts address ability-to-repay liabilities
Narrowly constructed Dodd-Frank rules could stymie a recovery in the mortgage finance market if originators fear the possibility of lawsuits stemming from the proposed ability-to-repay requirement under Regulation Z, capital markets experts warned Sunday. While speaking to a panel at the Mortgage Bankers Association National Secondary Market Conference & Expo in New York, expert panelists said mortgage banking professionals should use the open comment period on the Dodd-Frank provision to urge regulators to carefully craft the ability-to-repay requirement. The guideline, which falls under the Federal Deposit Insurance Corp. Regulation Z, would force creditors to predetermine whether a borrower has the ability to repay a mortgage prior to origination. The proposed rule would create four compliance options for creditors to stay in compliance with Reg Z's ability-to-repay requirement. The options available include verification of consumer income or assets to show they can make the mortgage payments. The rule also would offer a qualified mortgage exception, which could shield creditors from liability as long as the loan does not have negative amortization or unreasonable fees and the mortgage payment is underwritten using the maximum interest rate in the first five years. Ken Markison, associate vice president and regulatory counsel for the Mortgage Bankers Association, said the proposed "ability to repay standard" brings with it the potential for new liabilities, stretching from the risk of having to pay statutory damages for issuing a loan that is later deemed not qualified to court costs and attorneys fees. "It doesn't take much to imagine in the investor community and the originator community that these new liabilities reverberate," Markison said. Panelists attending the session said the industry needs to communicate these liability concerns to regulators to ensure the ability-to-pay provision and qualified mortgage rule are crafted to instill a sense of confidence in originators and investors. The comment period on the proposed ability-to-pay rule runs until July 22. Write to Kerri Panchuk.