New Federal Rules: Lenders Must Consider Mortgage Borrowers' Ability to Repay

Effective January 10, 2014, federal law requires mortgage lenders to consider a mortgage borrower's "ability to repay" when issuing a loan.

Effective January 10, 2014, federal law requires mortgage lenders to consider a mortgage borrower's "ability to repay" when issuing a loan. The goal of the new rules, authorized by the Dodd-Frank Act and issued by the Consumer Financial Protection Bureau, is to protect borrowers. In the past, mortgage lenders often made loans to people who had no realistic means of repaying the loan, especially after articifially low "teaser" rates ended, or balloon payments came due. All too often, the end result was default and then foreclosure.

The Ability to Repay (ATR) rule requires lenders to make a good faith determination that the borrower can realistically repay the loan. In making this determination, the lender must consider a set list of factors. In general, the factors require the lender to look at the borrower's income, assets, employment status, loan payment amount, other payments on the property, other debt payments, ongoing mortgage expenses, debt-to-income ratio, and credit history.

There are some big exceptions to this rule. The ATR requirement does not apply to open-end loans (like home equity lines of credit), reverse mortgages, and certain construction loans, among others. And a lender is presumed to have met the ATR standards for "qualified mortgages." Qualified mortgages are those that don't have risky features like negative amortization or balloon payments.

To learn more about the new ATR rule, see Nolo's article New Mortgage Rules on Ability to Repay.