CA 09-12Short-Term Balloon Loans and Regulation Z Repayment Ability Requirement for Higher-Priced Mortgage Loans

November 20, 2009

This letter provides answers to frequently asked questions regarding compliance with Regulation Z’s repayment ability rule for higher-priced balloon mortgage loans with terms of less than 7 years.1 In 2008, the Board revised Regulation Z, which implements the Truth in Lending Act and the Home Ownership and Equity Protection Act, to prohibit creditors from making higher-priced mortgage loans “based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.”2 This repayment ability rule and other consumer protections for mortgage loans took effect for applications received on or after October 1, 2009.

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