Residential Lending and the Ability to Repay Rule

By: Douglas L. Waldorf, Jr. & Sara K. White

On January 10, 2013 the Consumer Financial Protection Bureau issued a rule imposing new requirements on residential mortgage lenders. The “Ability-to-Repay” rule was created to help implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act in an effort to enhance the reliability of residential mortgages by ensuring that underwriting standards address consumers’ ability to repay their loans. Issued as a direct result of prior lending practices which often ignored borrowers’ financial health and ability to make payments, the rule is scheduled to take effect in January of 2014. As it now stands, the rule will apply to residential mortgage loans subject to the Truth in Lending Act.

The Ability to Repay Rule will require creditors to consider specific factors prior to approving a residential loan. While it does not dictate particular underwriting models, the Rule imposes, at a minimum, eight underwriting factors and standards that must be considered in the loan approval process: 1) the current or reasonably expected income or assets of the consumer; 2) the current employment status; 3) the monthly payment on the covered transaction; 4) the monthly payment on any simultaneous loan; 5) the monthly payment for mortgage-related obligations; 6) current debt obligations, alimony, and child support; 7) the monthly debt-to-income ratio or residual income and 8) the consumer’s credit history.