By Ronald D. Orol
RISMEDIA, April 21, 2011—(MCT)—The Federal Reserve recently proposed requiring banks to ensure borrowers can repay their mortgages before they give them a loan.
The rule is required by the Dodd-Frank Act, and it seeks to establish minimum mortgage underwriting standards, where borrowers could sue lenders if an appropriate effort isn’t taken to ensure they can repay the loan.
The provision allows lenders to make a “qualified mortgage,” a loan that meets certain standards that allow it to escape the liability associated with the provision.
The proposal is a response to a wave of “liar loans” that lenders offered in the years leading up to the financial crisis. In many cases, lenders asked borrowers to state their income without verifying whether they could afford the loan. This led to a wave of foreclosures, contributing to the crisis.
One type of qualified mortgage outlined in the proposal gives lenders special protection from borrower suits if the loan doesn’t have certain features such as negative amortization, which is where the loan balance increases because payments are made that fail to cover the interest due.
The Fed is soliciting comments on the proposal until July 22, 2011. The process of writing rules based on the Fed’s proposal is scheduled to transfer to the soon-to-be-effective Consumer Financial Protection Bureau (CFPB).
The Dodd-Frank Act requires the creation of the bureau, which will write rules for mortgages and other consumer credit products. The CFPB is set to take over enforcement of consumer protection laws on July 21, 2011.
(c) 2011, MarketWatch.com Inc.
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