Congress in the Dodd-Frank Act responded to concerns about the quality of mortgage loans by establishing incentives for lenders to seek to ensure that borrowers had the ability to repay mortgage loans made to them. In response to a directive from Congress, the Consumer Financial Protection Bureau (the“Bureau”) has issued its much anticipated Ability-to-Repay (“ATR”) Rule and Qualified Mortgage (“QM”) Rule (the “Rules”), which will go into effect on January 14, 2014. The following is a brief overview of the new Rules.

The Ability-to-Repay Rule -

The key to the Rules is the ATR requirement, which will require a lender to make a reasonable and good faith determination that a consumer has a reasonable ability to repay a loan in accordance with its terms. Any lender that fails to satisfy the ATR rule will be at risk for the following penalties and liabilities:

1. general Truth in Lending Act damages,

2. special ATR statutory damages, and

3. in a foreclosure action, a defense by recoupment or setoff.