' s responsibility to assess a borrower's ability to repay on every loan originated, effectively giving wronged consumers a private right of action without demonstrating that their case was part of a broader pattern. in addition, the new rule requires that the lender take into account future, predictable changes in payments in determining repayment ability. a lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. for example, on a 5 - 1 arm with a payment for the first five years based on a discounted interest rate, the lender would use the scheduled payment in the sixth and seventh years, which is based on the fully indexed rate. another element of our proposal that received many comments was a rule limiting prepayment penalties. on the one hand, numerous commenters argued that prepayment penalties can result in lower interest rates paid by the borrower. although there are exceptions i will mention in a moment, a number of studies have found that loans with prepayment penalties carry lower rates or annual percentage rates ( aprs ) than loans without prepayment penalties having similar credit risk characteristics. 2 on the other hand, the rate benefit was called into question by many, who asserted that prepayment penalties chris mayer, tomasz piskorski, and alexei tchistyi ( 2008 ), " the inefficiency of refinancing : why prepayment penalties are good for risky borrowers ", gregory elliehausen, michael e. staten, and jevgenijs steinbuks ( 2008 ), " the effect of prepayment penalties on the pricing of subprime mortgages ", journal of economics and business, vol. 60 ( jan. - feb. ), pp. 33 - 46 ; michael lacour - little ( 2007 ), " prepayment penalties in residential mortgage contracts : a cost - benefit analysis, " unpublished paper, january ; richard f. demong and james e. burroughs, ( 2005 ), " prepayment fees lead to lower interest rates ", but see keith s. ernst ( 2005 ), " borrowers gain no interest rate benefits from prepayment penalties on subprime mortgages, " research report, ( durham, nc : center for responsible lending, january ), http : / / www. responsiblelending. org / pdfs / rr005 - ppp _ interest _ rate -

return the price level to what was expected by people who signed long - term contracts, such as debt contracts, before the deflation began. however, such a strategy is inappropriate for the united states in current circumstances. inflation expectations appear reasonably well - anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability. in this context, raising the inflation objective would likely entail much greater costs than benefits. inflation would be higher and probably more volatile under such a policy, undermining confidence and the ability of firms and households to make longer - term plans, while squandering the fed ’ s hardwon inflation credibility. inflation expectations would also likely become significantly less stable, and risk premiums in asset markets – including inflation risk premiums – would rise. the combination of increased uncertainty for households and businesses, higher risk premiums in financial markets, and the potential for destabilizing movements in commodity and currency markets would likely overwhelm any benefits arising from this strategy. each of the tools that the fomc has available to provide further policy accommodation – including longer - term securities asset purchases, changes in communication, and reducing the ioer rate – has benefits and drawbacks, which must be appropriately balanced. under what conditions would the fomc make further use of these or related policy tools? at this juncture, the committee has not agreed on specific criteria or triggers for further action, but i can make two general observations. first, the fomc will strongly resist deviations from price stability in the downward direction. falling into deflation is not a significant risk for the united states at this time, but that is true in part because the public understands that the federal reserve will be vigilant and proactive in addressing significant further disinflation. it is worthwhile to note that, if deflation risks were to increase, the benefit - cost tradeoffs of some of our policy tools could become significantly more favorable. second, regardless of the risks of deflation, the fomc will do all that it can to ensure continuation of the economic recovery. consistent with our mandate, the federal reserve is committed to promoting growth in employment and reducing resource slack more generally. because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability. conclusion this morning i have reviewed the outlook, the