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Fed Releases TILA Regulation Draft

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The Federal Reserve System is seeking comments on a proposed regulation that could have some effect on sellers of credit life insurance, credit disability insurance and other credit insurance products.

The Federal Reserve Board is proposing the rule to implement provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that require it to revise the Fed’s Regulation Z, which implements the federal Truth in Lending Act (TILA).

Regulation Z now prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The proposed TILA rule would expand the scope of the ability-to-repay requirement to cover any consumer credit transaction secured by a dwelling, excluding niche market credit arrangements, such as timeshare plans and reverse mortgages.

The proposed rule contains references to two Dodd-Frank Act provisions that refer to private credit insurance products, such as credit life insurance and credit disability insurance.

One provision in the act will require the total sum of the points and fees associated with a covered mortgage loan to include ”[p]remiums or other charges payable at or before closing of the mortgage loan for any credit life, credit disability, credit unemployment, or credit property insurance, or any other life, accident, health, or loss-of-income insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract,” officials say in a preamble to the draft regulations.

Another provision in the act apparently will prohibit use of single-premium credit life insurance and most other forms of private single-premium credit insurance other than single-premium credit unemployment insurance, officials say.

Because of the ban on most forms of credit insurance, chances are that only the cost of single-premium credit unemployment insurance would be included in points and fees, officials say.

Because of the new limits on most forms of single-premium credit insurance, Fed officials have taken a reference to credit life insurance out of guidance it has been using to explain how to calculate a mortage borrower’s total loan amount.

Comments on the proposed rule are due July 22.

The new Consumer Financial Protection Bureau (CFPB) is supposed to come to life July 21, and it will be responsible for creating a final rule, officials say.

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