Writing the CheckThe next time you go back to the bank for a new mortgage loan, your lender may be asking you a few more personal questions. It’s part of the new Ability to Repay rule that lenders are subject to as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Rule changes

Lenders have always been concerned with a borrower’s ability to repay a loan, but in the late 1990s, lenders began selling off more of the loans they originated, making repayment less of their problem and more of a problem for the buyer. This led to some behavior that didn’t benefit consumers, and many point to the subprime mortgage crisis as the result.

Lenders are now held accountable for the loans they make and must prove that borrowers who get home financing can actually repay it. Lenders can be asked to buy a loan back from the quasi-government investors, Fannie Mae and Freddie Mac (now in conservatorship by the government), if they make a mistake. In fact, the only way to protect themselves from these buybacks is to follow a strict set of rules that result in a “qualified mortgage.”

Regulators have built the Ability to Repay rule into the qualified mortgage rules by capping the debt-to-income ratio at 43 percent. It also limits the fee that can be charged by the lender to 3 percent of the total amount of the loan. Interest-only and negative-amortization loans do not meet the guidelines of the qualified mortgage.

Consumer impact

What does this mean for consumers? According to the Mortgage Bankers Association, the Consumer Financial Protection Bureau’s definition of a qualified mortgage should not change the capacity for most borrowers to obtain mortgage loans, but others aren’t so sure.

Borrowers who need larger mortgages, or jumbo loans, might find getting a loan more difficult, for instance. Of course, new lenders could move into the gap to provide these loans, even though they aren’t qualified mortgages under the rules.

And there are likely to be some exceptions to the final rule when it goes into effect next year. With concerns high regarding struggling borrowers, regulators may find ways for certain borrowers to bypass the rules with certain products. Exceptions in this case might include allowing lenders to refinance risky mortgages such as interest-only and adjustable-rate loans without having to meet the Ability to Repay requirements.

The Ability to Repay rule will go into full effect in January, with many lenders already adapting to the new requirements.


Rick Grant has been covering financial services for the trade press for more than 15 years. He specializes in home finance and technology.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

About the Author

Rick Grant has been covering financial services for the trade press for over 15 years. He specializes in home finance and technology.

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