September 03, 2014 Article

The Ability-to-Repay Rule: New Causes of Action, New Defenses, and Securitization

An eight-factor analysis of prospective income is a necessarily subjective analysis, which has the potential for significant future litigation

by Lisa D. Liebherr

Swords and shields for mortgage-related litigation arising out of new regulations instituting “ability to repay” (ATR) requirements will affect the ongoing battles between mortgagors and mortgagees and provide additional protections for holders of securitized mortgages. The Truth in Lending Act (Regulation Z), 12 C.F.R. § 1026.43 (the ATR rule, went into effect on January 10, 2014, and established new minimum underwriting standards for mortgage origination. The new regulations promulgated by the Consumer Financial Protection Bureau (CFPB) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act are intended to “protect consumers from debt traps by requiring mortgage lenders to make a good faith determination that the borrowers can afford to pay back the mortgages before signing them up.”

Under the ATR rule, before originating a mortgage, mortgage lenders must use third-party records to verify any information on which they rely and must determine whether a borrower can afford a mortgage by analyzing a minimum of eight factors, including “customers’ income, assets, savings and debt” and the monthly payments on the loan. CFPB, Ability-to-Repay Rule: Fact v. Fiction Guide (Jan. 6, 2014). The lender must consider how these factors will play out over the life of the loan, not just in the short term. After this analysis, the lender can offer any mortgage it reasonably believes a borrower can afford.

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