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ICBA Thanks Federal Reserve for Providing Reg Z Relief

Balloon Payment Loans Maturing in Less Than Seven Years Not Prohibited

Washington, D.C. (November 10, 2009)—The Independent Community Bankers of America (ICBA) today thanked the Federal Reserve for issuing guidance clarifying that their July 2008 revisions to Regulation Z do not prohibit community banks from offering balloon residential mortgages that mature in less than seven years.

“We believe that this additional guidance will allow many community banks to refinance balloon mortgages coming due and continue to offer this important mortgage product, which they have been offering safely for many decades,” said Karen Thomas, ICBA executive vice president of government relations. “The Regulation Z amendments have been cutting off the only source of credit for many consumers who do not qualify for conforming loans at a time when it’s needed most.”

Issuing a set of questions and answers, the Federal Reserve clarified that while creditors have an affirmative duty to engage in prudent underwriting, they are not required to verify that consumers have the assets and/or income at the time of consummation that would be sufficient to pay the balloon payment when it is due.

Rather, the Federal Reserve said the creditor should verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the loan collateral. The creditor is not required to predict the consumer’s future financial circumstances, interest rate environment and home values.

ICBA has been leading the charge to seek relief from the onerous provisions of the Regulation Z amendments. ICBA staff and Texas community bankers met a week ago with Federal Reserve officials to discuss the Regulation Z amendments that were being interpreted as unnecessarily restricting many community banks from offering short-term residential loans with balloon payments that they held in portfolio. The Federal Reserve’s guidance was issued in response to this meeting.

Today’s guidance does not address the burden of creating escrow accounts for loans that meet the definition of “higher-cost.” ICBA will continue to work with policymakers to limit this requirement for community banks.