The Consumer Financial Protection Bureau (CFPB) published the final rule regarding Ability to Repay (ATR) and Qualified Mortgage (QM) Standards under the Truth in Lending Act (Regulation Z). Lenders are now required to make a “reasonable” and “good faith” determination of a borrower’s ability to repay a residential mortgage loan.
The reality for most lenders is that the free market has already addressed the issues related to borrower’s Ability to Repay. However, for those remaining, the rule has opened the door for liability and litigation – especially considering any future foreclosure action.
The General Rule:
The lender may not make a residential mortgage loan unless the lender makes a “reasonable” and “good faith” determination that is based upon “verified documentation” before closing, and has made a determination that the borrower will have a “reasonable ability to repay” the loan according to the loan terms.
The mortgage loans that are covered generally include: loans secured by a 1 to 4 unit dwelling (including mobile homes), purchase, refinance, and home equity loans (not HELOC), 1st and subordinate financing, and both principal residence or a second home.
Liability:
The liability for a lender, and later assigns of the mortgage, who fails to make this determination include actual damages – including the down payment, statutory damages – such as finance charges or fees, and attorney’s fees. Moreover, beyond these money damages, a violation may also provide a defense to foreclosure.
It is important to remember that a three year statute of limitations applies - EXCEPT in a foreclosure action.
Compliance:
There are two ways to comply with the rule regarding the Ability to Repay. A lender can be in compliance either by following ATR underwriting requirements and/or by falling into the protections provided by lending under the Qualified Mortgage standards.
Underwriting Requirements:
It is important to remember that the following factors must be verified by 3rd party sources when determining if it is “reasonable” to believe that the borrower has the Ability to Repay:
- Income and assets
- Employment
- Monthly payment of the loan
- Monthly payments of any first or additional loans
- Monthly payment of other obligations related to the mortgage
- All other borrower debt obligations
- Debt to income
- Credit history
Conclusion:
Unfortunately the general rule is fraught with ambiguity – “reasonable” & “good faith” are terms without certain definition. Furthermore, the rule provides requirements for the lender to consider, but it does not set underwriting standards. This could result in a borrower that could argue that although the lender considered these factors when determining if the borrower had the Ability to Repay the standards were not stringent enough and thus the lender did not make a reasonable determination.
Lenders who desire more certainty then what the general rule provides should consider the additional protection provided by lending what the CFPB has determined to be a Qualified Mortgage (QM). The next blog will focus in detail on Qualified Mortgages, their requirements, and ability to limit liability.
Here at the Rutan Law Firm we work to ensure our clients are familiar with issues that affect their business regarding compliance and potential litigation. Please call us with any questions at (770) 814-0340.