Eight Factors of Repayment Requirements

In case you haven’t heard by now, in recent months the Federal Reserve’s Board of Governors proposed a rule to establish Ability to Repay/Qualified Mortgage requirements, amendments to the Truth in Lending Act (TILA) under the Dodd-Frank Act. As part of the proposal, the Board presented eight factors to satisfy the general ability to repay requirements, which include considering and verifying:

1. The consumer’s current or reasonable expected income or assets, other than the value of dwelling that secures the loan
2. If creditor relies on income from the consumer’s employment in determining repayment ability, the consumer’s current employment status
3. The monthly payment on the mortgage loan calculated based on fully indexed rate and monthly fully amortizing payments that are substantially equal
4. The consumer’s monthly payment on any simultaneous loan the creditor knows or has reason to know will be made, including the payment under a loan or Home Equity Line of Credit (HELOC) that will be secured by the same dwelling and made to the same consumer at or before consummation of the covered transaction based on the payment required under the plan and amount of credit dawn at consummation of the transaction
5. The consumer’s monthly payment for mortgage-related obligations
6. The consumer’s current debt obligations
7. The consumer’s monthly debt-to-income ratio (DTI) or residual income
8. The consumer’s credit history

In addition to the above, the proposal states: “Under the general ability to repay standards, there are no numerical limits on the loan’s features, term, or points and fees, but the creditor must follow certain underwriting requirements and payment calculations. The proposal limits the creditor to consider and evaluate a consumer’s repayment ability using widely accepted governmental or non-governmental underwriting standards.”

At the time the Board proposed this rule, it also solicited public comment through July 22, 2011. Many influential industry organizations, including the Mortgage Bankers Association (MBA), are strongly backing the proposal. You can download the MBA’s full commentary here or highlights of the proposed rules here.