Compliance Blog

Posted by Anthony Demangone

Earlier this week, the Federal Reserve issued a 474-page proposal that will greatly affect mortgages by the time it ends up in its final form.  Here's why

The Federal Reserve Board on Tuesday requested public comment on a proposed rule under Regulation Z that would require creditors to determine a consumer's ability to repay a mortgage before making the loan and would establish minimum mortgage underwriting standards.

In short, Dodd-Frank mandated that rules be written that prohibit creditors from making "mortgage loans" without regard to a consumer's ability to repay  The Fed's proposal is written pursuant to that Dodd-Frank mandate, and it extends "ability to repay" requirements to any consumer credit transaction secured by a dwelling, other than open end credit.  The proposal will give you four different ways to comply with that requirement. If your credit union offers mortgages, or is thinking of doing so, this rulemaking is one that you'll have to read and digest. There's just no two ways about it.  But, here's a possible way to tackle it.

1. First, read the press release that the Fed issued with this proposal. It provides a thumbnail sketch of what the proposal will do.  
2. Second, read this 3-page summary of the entire rule found within the proposal.  It adds a bit more meat than the press release.
3. Third, I'd read the Fed's 3-page overview of the "ability to repay" rules. This is a separate "guidance" document, independent of the proposal itself.  I wish more regulators would issue such documents. 
4. Next, I'd read the proposed rule itself.  I've ripped out the 27 pages that appear to contain that information. 
5. If you're really a busy beaver, why not work through the staff commentary to this proposal? It will cost you.  83 pages to be exact.  
6. Now, if you really want to show off, read the section-by-section analysis. But watch out, as this section weighs in at 326 pages.  You might want to use this section if there is a particular section or component of this proposal that gives you heartburn. If you read the section-by-section analysis that covers it, you'll get a great understanding of what the regulators were thinking. 

That should give you a framework through which to start digesting this rule.  With that in mind, here are a few additional thoughts:

• This is just a proposal.  Now, don't get me wrong.  This train has left the station, and it will arrive at its destination.  This rule is required by Dodd-Frank, so I wouldn't worry right now about it possibly going away.  But keep in mind that since it is a proposal, some of the ideas thrown out by the Fed may not make it into the final rule.
• The Fed indicated that it will not finish this rulemaking.  It will tag out at some point to the CFPB. They'll bring it home. 
• We need your help.  NAFCU will prepare a comment letter on behalf of our members.  If you see something that is really problematic in here, let us know.  Emails are fine. 

Happy reading, everyone.