The Conference of State Bank Supervisors (CSBS) has submitted a letter in response to a proposed rule from the Federal Reserve Board (FRB) to implement the Ability-to-Repay provisions of the Dodd-Frank Act. CSBS believes the logic behind both the Dodd-Frank Act and the FRB’s proposal is sound: Creditors should consider and verify a consumer’s ability to repay a mortgage.

“Accordingly, CSBS supports the requirement that a creditor make a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan according to its terms," said CSBS President and Chief Executive Officer Neil Milner in the comment letter.

In the letter, CSBS expressed its opinion that, in addition to ensuring that loans are made in a prudent manner, the proposed requirements will provide benefits to the industry by holding all lenders to the same minimum standards.

CSBS also supports the flexibility the proposal gives to lenders seeking to originate a qualified mortgage (QM), which is the embodiment of a presumption that a creditor has considered a borrower’s ability to repay in a meaningful manner. The proposal does not set thresholds or limits on repayment ability factors that must be considered to meet the definition of a QM.

"CSBS believes a mortgage carrying the qualified mortgage presumption of compliance should be a strong indication that a reasonable ability to repay determination has been made, not an exception that can be used to escape the consideration of crucial underwriting criteria," said the letter.

The CSBS did raise concern with the criteria for the balloon QM, noting that community banks originate balloon payment loans to hedge against interest rate risk. Milner asserted that the statutory exception for balloon QMs should be extended to all institutions which portfolio such loans.

"With proper underwriting, use of this product is driven by interest rate risk, which institutions bear along with the heightened credit risk associated with a balloon payment within their portfolio," said the letter regarding balloon QMs. "Accordingly, the exception for balloon qualified mortgages should be extended to all institutions that portfolio this kind of product to mitigate credit risk."