After considering a proposed rule and comments for more than a year and a half, the Consumer Financial Protection Bureau (the “Bureau”) has issued its highly anticipated final “Ability-to-Repay” rule (the “Rule”) governing residential mortgage lending under Regulation Z. As promised in our earlier flash Alert on the Rule, we are providing in this memorandum a detailed summary and analysis of the final Rule, which becomes effective on January 10, 2014. We also assess the Bureau’s concurrently issued proposal (the “Concurrent Proposal”), which seeks comments by February 25, 2013 on potential amendments to the Rule.

As noted in our earlier Alert, the Rule is likely to have a profound influence on the availability and cost of residential mortgage credit for many years, due to the severe penalties established by Congress for Rule violations. Specifically, a borrower in foreclosure may seek set-off damages from the creditor or assignee of the loan amounting to three years of finance charges and fees paid, as well as actual damages, prescribed statutory damages, court costs and attorney fees. There is no statute of limitations on that foreclosure set-off action. A borrower also may file an affirmative suit within three years of an alleged violation. TILA bars lenders from attempting, at the time of origination, to shift potential ability-to-repay (ATR) challenges into arbitration forums or nullifying the right to an ATR challenge through the use of a consumer waiver. The Bureau will examine bank and non-bank lenders for their compliance with the Rule, and may also bring enforcement actions for Rule violations. The Rule also is likely to become a subject of repurchase or indemnity requests, particularly given the existence of assignee liability; conversely, repurchase or indemnity requests from the government-sponsored enterprises (GSEs) or the Federal Housing Administration (FHA) could lead to allegations of violations of the Rule.

Please see full alert below for more information.