The Federal Reserve Board issued a proposal this week that would force borrowers to show their ability to repay a mortgage.
Under the plan, creditors would be required to ascertain a potential consumer's ability to pay for his home before making a loan, as well as establish minimum mortgage underwriting standards.
The proposal, released, Tuesday gives creditors four options to comply with the new standard, which is required under the Dodd-Frank Act.
A creditor could consider and verify a consumer's income or assets under one scenario, or a creditor could make a "qualified mortgage," which would provide special protection from legal liability. (The Fed is working on two approaches for defining a "qualified mortgage.")
Another option for creditors in rural or underserved areas is to make a balloon-payment qualified mortgage.
Lastly, a creditor would be able to refinance a nonstandard mortgage with risky features into a more stable standard mortgage with lower monthly payments.
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