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‘Ability to pay’ in 475 pages

By Marcie Geffner · Bankrate.com
Friday, April 22, 2011
Posted: 9 am ET

Four hundred seventy-five pages.

That's the length of the Federal Reserve's latest notice of a proposed rule to implement a federal law that says lenders must determine whether a borrower has the ability to repay a mortgage.

The issue of whether a borrower can repay a loan is naturally somewhat tricky.

But 475 pages?

That's longer than most novels, and the notice is significantly more challenging, if not impossible, to read.

Consider two snippets, chosen at random:

  • "Current §226.32(b)(1)(i) requires that 'points and fees' include 'all items required to be disclosed under §226.4(a) and 226.4(b)' -- the provisions that define the term 'finance charge' --'except interest or the time-price differential.' Proposed §226.32(b)(1)(i) would revise the current provision to include in points and fees 'all items considered to be a finance charge under §226.4(a) and 226.4(b), except --"
  • "Specifically, §226.43(b)(11) defines the term 'recast' as follows: (1) for an adjustable-rate mortgage, as defined in §226.18(s)(7)(i),34 the expiration of the period during which payments based on the introductory interest rate are permitted under the terms of the legal obligation; (2) for an interest-only loan, as defined in §226.18(s)(7)(iv),35 the expiration of the period during which interest-only payments are permitted under the terms of the legal obligation; and (3) for a negative amortization loan, as defined in §226.18(s)(7)(v),36 the expiration of the period during which negatively amortizing payments are permitted under the terms of the legal obligation."

Can anyone actually understand that? Or read 475 pages of it?

Wouldn’t it be more honest to present the total monthly cost to the borrower and ask: Can you afford this payment, plus the utilities and repair and maintenance costs for this home?

If the borrower says yes, it's all good to go. If the borrower says, no, it's back to the rate sheet. After all, the borrower should be the best judge of his or her own financial capacity with the proviso that the true cost must be disclosed.

What's needed isn't 475 pages of subparagraph references, but straight talk and common sense -- of the old-fashioned kind.

Follow me on Twitter: @marciegeff

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