November 10, 2009 If your bank quit making mortgage loans because of the uncertainties surrounding the permissibility of using short-term balloons on loans that might be Higher-Priced Mortgage Loans, there may be reason to reconsider... This briefing talks about new guidance on the balloon issue, the current status of credit card and open end credit regulatory and legislative revisions, and reminds you of new regs on education loans. No crystal ball required! One of the most hotly debated issues regarding the Higher-Priced Mortgage Loan provisions of Regulation Z which took effect October 1, 2009 relates to whether a lender can satisfy the requirement to assess the borrower's ability to repay an HPML when the loan involves a balloon note with a term of less than seven years. Until now, it was purely a matter of speculation. No one could say for sure whether short term balloon notes were permissible for HPMLs, in the absence of definitive guidance from the Federal Reserve. The Federal Reserve has now issued a two page letter to officers and managers in charge of its consumer affairs sections. In it, the FRB addresses four specific questions relating to short-term balloon loans and Regulation Z's repayment ability requirement for higher-priced mortgage loans. To bottom line it, short-term balloons on HPMLs aren't prohibited; the lender doesn't have to verify that at consummation the consumer has the means to pay off the balloon when it comes due, but there is an affirmative duty to engage in prudent underwriting. While the lender doesn't need to predict what the borrower's future financial position is going to be, what the interest rates will be like, and how much the dwelling will be worth down the road when the balloon comes due, the lender does need to look at issues such as theamount of equity in the property, loan-to-value ratio, and the borrower's debt-to-income ratio at consummation to get a clue about whether the borrower is likely to be able to refinance the loan or pay it off when the time comes. Read the FRB's letter. Not surprisingly, Bankers' Threads is already buzzing with opinions about the FRB guidance. Join the discussion! What's Happening with the Open End Rules? The change of administration, shifts in power and influence in Congress, the throes of an economic depression and an ongoing process at the Federal Reserve Board to review and revise Truth in Lending rules have formed the "perfect storm" for regulatory upheaval in several areas, not the least of which is the open end portions of Regulation Z. Here's a synopsis of final rules and proposals affecting open-end credit. January 29, 2009 - Regulation Z and Regulation AA rules, both effective July 1, 2010. The Reg Z changes made significant changes to non-home-secured open-end credit affecting applications and solicitations, account opening disclosures, periodic statements, change in terms notices and advertisements. The Regulation AA amendments, issued in coordination with the OTS and NCUA, were designed to protect consumers from unfair or deceptive acts or practices affecting consumer credit card accounts under the Federal Trade Commission Act. May 5, 2009 - The Fed published proposed clarifying amendments to July 1, 2010 Reg Z rules in May 2009 and agencies published proposed clarifications to their July 1, 2010 Reg AA rules. May 22, 2009 - Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) was enacted. Some of its provisions are similar to pending Regulation Z changes to be effective July 1, 2010. Several other new requirements added by Congress, and effective dates are imposed in the law. July 22, 2009 - Interim final rule to implement August 20, 2010 effective date for Credit CARD Act provisions mandating 45 days' advance notice of certain rate increases and substantive changes in terms, and delivery of periodic statements at least 21 days prior to payment due date. The Fed plans to make any changes to the interim rule prompted by comments in connection with final rulemaking under its October 21 proposal (below). August 26, 2009 - Fed publishes proposed Reg Z changes affecting HELOC application and account opening disclosures, periodic statements and change in terms notices. October 21, 2009 - Fed publishes proposed Reg Z amendments to implement sections of the Credit CARD Act with effective dates of February 22, 2010. These rules would limit application of increased rates to existing balances, require that creditors assess an applicant's ability to repay, establish special requirements for extensions of credit to consumers under age 21, and limit overlimit fees on credit card accounts. In the October 21 proposal, the Fed announced its intention to leave its July 1, 2010 effective date rules in place for now, but to amend or withdraw those parts of those rules inconsistent with the Credit CARD Act when it finalizes the February 22, 2010 rules. At the same time, the Fed plans to move its Reg AA rules to be effective July 1, 2010 into Regulation Z and to finalize the clarifying amendments proposed on May 5, 2009. There remain two provisions of the Credit CARD Act with due dates of August 22, 2010 regarding reasonable and proportional penalty fees and charges and re-evaluation of rate changes. That list doesn't include any of the changes the Fed made or proposed for the closed-end and education loan provisions of the regulation. Do you remember the old Abbott and Costello "Who's on First?" gag? Congress Tweaks Credit CARD Act On Friday, November 6, the President signed the Credit CARD Technical Corrections Act of 2009, which amends the Truth in Lending Act to limit to credit card accounts the new requirement that open end credit periodic statements be delivered at least 21 days before a payment due date. The requirement, which was effective August 20, 2009, had been applicable to all consumer open-end credit accounts. We can expect amendments to Regulation Z's section 226.5(b)(2) to implement this correction. Threads of Interest The Bankers' Threads discussion board has been a virtual lifeline over the last year for bankers struggling to understand all the nuances of the many recent regulatory changes. We've compiled a set of links to some of our favorite lively threads on the latest lending compliance challenges. Check them out. Upcoming Webinar Every bank is likely to make at least a few of the loans covered by the new Reg Z provisions that deal with non-governmental education loans. The new requirements require separate disclosures and all of the fun stuff that goes along with the disclosures. The 65 pages of new regulations and commentary take effect February 14, 2010. Learn MORE in the upcoming BOL Learning Connect Webinar on Friday, Nov. 13th as Mary Beth Guard and Jack Holzknecht explain which of your loans will be impacted and what you will need to do to comply.