Federal Reserve Issues Proposed Ability-to-Repay Rule

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On April 19, 2011, the Federal Reserve Board (“Board”) issued a proposed rule to implement ability to-repay requirements for closed-end residential loans. The proposed rule is designed to implement Section 1411, Section 1412 and part of Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (“Dodd-Frank”). This Client Alert provides background information, summarizes the proposed rule, and offers some commentary.

Dodd-Frank was enacted on July 21, 2010. Section 1411 of Dodd-Frank establishes a new ability-to-repay standard for certain closed-end residential mortgage loans. Section 1412 of Dodd-Frank establishes a presumption that a qualified mortgage (“QM”) will meet the ability-to repay standards of Section 1411. A provision in Section 1414 of Dodd-Frank prohibits prepayment penalties for residential mortgage loans that fail to meet the QM standard, and limits the prepayment penalties for residential mortgage loans that do meet the QM standard.

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