This Week’s TriComply Newsletter Article

April 15, 2013

Guidance on Ability To Repay and Qualified Mortgages

by Blair Rugh

On April 10, 2013, the Consumer Financial Protection Bureau published a compliance guide on Ability To Repay and Qualified Mortgages for small entities, which would include most community banks. Actually, the 45-page guidance is for all lenders. Unfortunately, the guidance did little more than restate what is in the final regulation and the commentary and did not provide any insight into some of the thornier issues involved in ability to repay and qualified mortgages.

The underwriting standards for ability to repay are fundamentally the same as most financial institutions have used for years. You verify income, obligations, and assets. Then, you determine if the customer’s mortgage payment will or will not exceed some established percent of his or her income and whether the customer’s total debt payments will exceed some greater established percent of his or her income; if both ratios fall within acceptable limits and the customer’s credit history is acceptable, generally, you make the loan. Unfortunately, those underwriting standards do not measure the ability to repay. Lenders have never attempted to measure ability to repay because there is no standard measure. And, the ability to repay underwriting standards in the new regulation do not measure ability to repay either, but that is the result that must be accomplished.

The failure in the ability to repay calculations and the reason ability to pay is a false standard is that every situation is different. After I subtract my debt obligations and my property-related expenses from my income, my residual income remains. The question is whether that is sufficient for me to live on. I live in Florida, which has no state income tax. Therefore, theoretically, I need less residual income than someone who lives in California. Typically, a couple with no children would need less residual income than a couple with three children. The cost of living can differ greatly from one section of the country to another. But, the ability to repay underwriting standards in the regulation don’t take into account any of these factors. The writers of the regulation attempted to make up for the failure by writing voluminous standards on how to calculate income. That is like giving someone a road map to an unknown destination that only takes them half way there.

How do you know if your underwriting of a particular loan was successful? If the customer pays it. Seriously. The regulation and the commentary indicate that the best test for whether you have accurately determined a customer’s ability to repay is if the customer makes the required payments for a significant period of time. On the other hand, if the customer defaults, and there was no intervening significant change in circumstance, that is strong evidence that you did not properly assess the customer’s ability to repay. In other words, you will not know if your underwriting was acceptable regulatory-wise until a year or two after the loan closes.

Also, the CFPB provides no guidance on issues that change between the time a loan is underwritten and approved and it closes. The example I frequently use is that of a married couple with no children who both work. Using their joint incomes, they qualify for the loan for which they have applied. Prior to closing, they tell the loan officer that the wife is pregnant and that as soon as the baby is born, she intends to quit her job and become a stay-at-home mom. Without her income, they do not come close to qualifying for the loan. What do you do? My guess is that the CFPB will not provide any further guidance on how to determine ability to repay; so, it may be years until lawsuits are filed and trickle through the court system before we really know what the standards are.

Unfortunately, the damages in an individual case can be substantial and, unlike all Regulation Z violations we have faced in the past, are immeasurable in advance of a jury verdict. In most Regulation Z areas of liability to a customer, the amount of the liability is the amount that the finance charge was under-disclosed. There is also a “sneaker” in the Truth in Lending Act that allows a consumer to recover “…any actual damages sustained by such person as a result of the failure…”

In virtually every foreclosure action on loans made after the new rules are in effect, a defense will be made that the lender inaccurately determined the customer’s ability to repay. “If the lender had calculated it correctly, we wouldn’t be here.” “If the lender had not made me the loan, I wouldn’t have lost the $40,000 down payment I made on the home; I wouldn’t have had my automobile foreclosed on; my credit wouldn’t have been ruined; and on and on. Certainly, my damages are substantial. All because of that greedy lender.” In many cases, the ability to repay rules will likely have a significant negative impact on a lender’s ability to foreclose.

In most cases, lenders will attempt to make qualified mortgages and get the safe harbor from an affordability challenge, but in many cases, that may not be possible. Hopefully, we will not soon go through another housing recession where foreclosures are as prevalent as they have been in recent years. In the meantime, I recommend that lenders visit with their attorneys and get their advice on the structuring of their loan products and their underwriting standards.

TriComply, Compliance Service

Blair Rugh would like to inform you of our TriComply, compliance service.  We can offer banks a full compliance package that will provide you with quality assistance at a price that will allow you the ability to meet your compliance budget. With our newest feature being the compliance manual we are now providing our clients with a complete compliance service. TriComply provides you with the TriComply Knowledgebase, Compliance manual, Policy Manual (written and reviewed), Compliance Newsletter (weekly), Advertisement Review, Compliance Calendar, Helpful Resources and an Online Training Library of compliance webinars.  It also includes our newest feature the Mortgage Loan Disclosure Calculator.

The CFPB now has control over all certain consumer protection laws. As a result, we have put out a product called CFPB Comparisons: What Really Changed so that you can see first hand what really changed, moved, was re-numbered, went away, etc.  Short of otherwise going line by line yourself, this product will save you hours of stress, anxiety and work 🙂  We have done it for you!


Please contact Starr Largin at (205) 547-2765 or [email protected] or Darryl Brasfield at [email protected] to receive information regarding TriComply or to schedule a demo.


To receive special pricing as a client of DBI Financial Systems
please contact:

   Starr Largin (205) 588-4316
[email protected]

     To receive special pricing as a
client of DBI Financial Systems
please contact:

        Starr Largin (205) 547-2765
[email protected]
Darryl Brasfield
[email protected]


 Prior Newsletter Archives

March 25, 2013
I Kind of Understand the New
Rules, What Do I Do Next?

March 18, 2013
And the Insanity Continues

December 3, 2012
Changes to the Appendices of Regulation V

November 26, 2012
Management of Time Deposits

November 19, 2012
Just in Time to Give Thanks…
The Agencies’ Bounty

November 12, 2012
Management of Savings Accounts

November 5, 2012
Oops, Silly Me and More

October 1, 2012
Regulatory Changes Affect
More Than Just Compliance

August 27, 2012
Proposed New Rules
on Appraisals

August 13, 2012
The Consumer Financial
Protection Bureau Strikes Again

August 6, 2012
New Restrictions on Dealing
With Insiders

July 30, 2012
Flood Insurance Rule Changes

July 23, 2012
Deposit Insurance Fees:
The FDIC Gets A Little Testy

July 16, 2012
Authentication In An Electronic
Banking Environment: What Is
Commercially Reasonable?

July 9, 2012
Now It’s Your Turn

June 25, 2012
Banking and Lotteries

June 18, 2012
A Refresher Course on the Right
to Rescind for Closed End Loans

June 13, 2012
Credit Risk Stress Testing

June 6, 2012
A Significant Change In The
Interpretation of RESPA

May 31, 2012
The Basics of Unlimited Federal
Deposit Insurance

May 12, 2012
The SAFE Act Revisited

May 9, 2012
Social Media: What a Financial Institution Needs to Know

April 25, 2012
More Than a Warning Shot

April 18, 2012
Prepare for the New Mortgage
Servicing Rules

April 11, 2012
Spring Cleaning with a Sanity

April 4, 2012
Combined RESPA and TIL
Disclosures:There is more to
the proposed changes than
meets the eye

March 29, 2012
Diversity in the Banking

March 19, 2012
Applicants, Consumers,
Co-Signers and Co-borrowers:
Those Pesky Definitions

March 8, 2012
Suspicious Activity Reporting:
When Does An Activity Become