The proposal would prohibit creditors from engaging in a pattern or practice of extending credit to a consumer without regard to the consumer's repayment ability and create a rebuttable presumption that the rule has been violated where a creditor engages in a pattern or practice of failing to consider debt-to-income ratio and the ability to make fully amortizing payments including taxes and insurance.

NAFCU agreed strongly that credit unions should carefully manage risk exposures when participating in subprime lending activities by conducting a "careful and credible analysis of borrowers' repayment capacity," said the letter. And while the basic tenets of the Federal Financial Institutions Examination Council Mortgage Guidance provides sound underwriting principles, NAFCU does not believe that these principles "should be imposed on federal depository institutions via regulation." Neither does it support the regulatory codification of a repayment ability standard via the proposed prohibition against a "pattern or practice of extending credit without regard to repayment ability." NAFCU strongly urged the board to retain the proposed "pattern or practice" element in the final rule.

NAFCU agreed that creating civil liability for an originator failing to assess a borrower's ability to repay a loan could cause a reduction in the availability of mortgage credit to consumers. So if the "pattern or practice" element is removed from the prohibition, the threat of litigation may force lenders to price for this increased risk, thereby raising the cost of credit. "This is particularly true in the case of federal credit unions because, as member-owned, not-for-profit cooperatives, any adverse economic impact on a credit union is ultimately felt by its members," wrote Berger.

NAFCU appreciated the "safe harbor" provision included, which finds creditors in compliance if they have a "reasonable basis to believe" borrowers will be able to make loan payments for at least seven years after consummation of the loan, but said seven years is unreasonable. NAFCU recommended the FHA's three-year term be used to satisfy the safe harbor requirement.

Regarding the documentation of income, NAFCU offered that when credit unions are faced with loan characteristics that create a higher level of risk, it is important for lenders to ensure that income information is accurate and verifiable. But they maintained there may be circumstances where a reliance on stated income is appropriate.

"We are concerned, however, that the rule, as proposed, lacks sufficient flexibility and may impose an unnecessary regulatory burden on credit unions," said NAFCU, seeking that the board clarify the documentation requirement in the proposed rule. Subordinate-lien loans should be exempted from the income verification requirement in order to provide greater flexibility to lenders, Pamela Yu, NAFCU associate director of regulatory affairs, told Credit Union Times.

The board's proposal extends the Reg Z prohibition of prepayment penalties for HOEPA loans. NAFCU said the penalties discourage–and often prevent–borrowers from refinancing or selling their homes and significantly undermine consumer choice. Credit unions are already prohibited from prepayment penalties and said extending the ban to all lenders would not only level the playing field, but remove any incentive for unscrupulous lenders to entice consumers with lower up-front costs, only to impose unaffordable prepayment penalties on the back end. NAFCU recommended that the exceptions to the prohibition be eliminated for both higher-priced mortgage loans and HOEPA loans.

As escrows for taxes and insurance benefit both lenders and borrowers, NAFCU believed that requiring escrow for subprime loans is a prudent measure. Nevertheless, it is ultimately the consumer's prerogative whether to escrow and NAFCU did not want escrows to be a regulatory requirement for higher-priced mortgage loans. Should this requirement be mandated, however, NAFCU asked that exceptions be considered for loans with a low loan-to-value ratio.

"While making escrow mandatory has obvious benefits to both the borrower and lender, making it a regulatory requirement would impose a significant burden on credit unions, particularly smaller ones. And it would be very costly," the letter read.

NAFCU agreed that new rules for all closed-end mortgage loans secured by a principal dwelling would require creditor payments to mortgage brokers, including yield spread premiums, appraiser coercion, and loan servicing practices.

As to the proposed advertising provisions modifying disclosure requirements for mortgage advertisements and prohibiting 'teaser' promotions and other misleading advertising practices, NAFCU wholly agreed they should be banned. While credit unions do not engage in such practices, NAFCU asked that the prohibition be extended to advertisements for home equity plans as well.

Finally, NAFCU asked that the rule's six-month implementation period be changed to a delayed effective date, recommending a minimum 12 months, as compliance will require lenders to revise policies, conduct staff training, and modify disclosures.

–[email protected]