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News about complying with mortgage laws, rules and regulations.

Guidance Issued on High-Rate, Short-Term Balloons

OCC warns against collateral-based decisions

March 25, 2010

By staff

The government has clarified its stance on short-term mortgage lending at high interest rates by banks.

In 2008, the Board of Governors of the Federal Reserve System revised Regulation Z to prohibit creditors from making higher-priced mortgage loans based solely on the value of the property. The revisions took effect on Oct. 1, 2009.

The Fed published Consumer Affairs letter CA 09-12 on Nov. 9, 2009, to provide clarity on certain amendments to Reg Z, which implements the Truth-in-Lending Act. The letter includes frequently asked questions about Reg Z's repayment ability rule for higher-priced balloon mortgage loans with terms under seven years.

"The questions and answers contained within the letter confirm that the Regulation Z amendments do not prohibit financial institutions from making short-term balloon loans that are higher-priced loans," the Office of the Comptroller of the Currency explained in a statement today. "However, financial institutions are required to use prudent underwriting standards and should determine that the value of the collateral is not the basis for repayment of the obligation."

The OCC advised institutions to verify the prospective borrower's ability to make the monthly mortgage payment. In addition, they should verify that the customer would likely be able to satisfy the balloon payment obligation either by refinancing the loan, using income or with assets other than the collateral.

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