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.

Please see full alert below for more information.

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