On Thursday, January 10, 2013, the Consumer Financial Protection Bureau (CFPB) released its final rule on the ability-to-repay requirements, including the definition of “Qualified Mortgage,” that was mandated by the Truth-in-Lending Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule requires lenders to consider and evaluate whether prospective borrowers have the ability to repay their mortgage loans over the long term and seeks to prohibit what the CFPB has identified as “risky lending practices” that contributed to the 2008 housing crisis. The type of mortgage loans covered by the new rule includes traditional residential mortgages and any consumer credit transaction that is secured by a dwelling, subject to certain enumerated exceptions. In addition, the CFPB has proposed an amendment to this rule that would add other exemptions from the ability-to-repay requirements. The rule will become effective on January 10, 2014.

Requirements of the Ability-to-Repay Rule -

Under the rule, in determining whether a borrower has the ability to repay a mortgage loan, lenders must obtain the borrower’s financial information from a reliable third-party. At a minimum, lenders must document the borrower’s employment status, income and assets, current debt obligations, alimony, child support, credit history, monthly payments on the mortgage loan, monthly payments on any other mortgages on the same property and monthly payments for mortgage related obligations. Lenders may no longer offer no-doc or low-doc loans, where lenders made quick sales by not requiring any, or requiring very limited, documentation. Lenders must evaluate the borrower’s financial information and conclude that the borrower has the ability to repay the loan. Additionally, lenders may no longer base their evaluation of a borrower’s ability to repay on teaser rates. Instead, a lender must determine the borrower’s ability to repay both the principal and the interest over the long term.

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