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Fed opens comment period for Reg Z ability-to-repay requirement

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The Federal Reserve has opened the public comment period for a proposed Dodd-Frank rule that would force creditors to predetermine whether a borrower holds the ability to fully repay a mortgage prior to origination. The proposed rule falls under Regulation Z and would apply to all consumer mortgages, except those issued to equity lines of credit, timeshare plans, reverse mortgages and temporary loans. The proposed rule would create four compliance options for creditors to stay in compliance with Reg Z's ability-to-repay requirement. These options include verification of consumer income or assets. The rule also would offer a qualified mortgage exception, which would 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. Other proposals include an exception for creditors operating in underserved areas. Borrowers in these area would still be allowed to 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," the central bank said. Another proposed option allows a creditor to refinance a non-standard mortgage into a more-stable mortgage with a lower monthly payment. The Fed said this option could preserve access to streamlined refinancing. The comment period on the proposed rule runs until July 22. The proposed guideline will be passed on to the newly created Consumer Financial Protection Bureau, which opens July 21. Write to Kerri Panchuk.

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