Ability To Repay

The ability to repay refers to an individual's financial capacity to make good on a debt. Specifically, the phrase "ability to repay" was used in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to describe the requirement that mortgage originators substantiate that potential borrowers can afford the mortgage they are applying for.

Under this act, the Consumer Financial Protection Bureau (CFPB) was given jurisdiction to create new rules and regulations for the mortgage industry. According to the new rules, the loan originators must look at a borrower's total current income and existing debt, to make sure that the existing debt plus the potential mortgage debt, property taxes and required insurance do not exceed a stated percentage of the borrower's income.

Ability to repay is sometimes abbreviated ATR.

The ability to repay was included as a requirement for a mortgage as a response to the mortgage crisis in 2008. Before ability to repay became a requirement for obtaining a mortgage, lenders could provide mortgages to homebuyers whose income did not demonstrate the ability to pay the monthly mortgage payments. This is part of what led to the housing bubble of the 2000s, and the mortgage crisis that followed. This resulted in a large number of homes being foreclosed in a relatively short period of time.

Under the new mortgage regulations stipulated by the CFPB individuals who are not properly subjected to the ability to repay standard during the origination process may have a defense against foreclosure.

The CFPB specifies eight factors that determine whether a borrower demonstrates that they have the ability to repay. Based on these standards, the lender makes a reasonable and good-faith decision about the borrower’s ability to repay the loan.

The factors used to determine ability to repay include the borrower’s current income and assets. This may also include reasonably expected income that will be used for payments on the loan. The borrower must also provide verification of this income and their employment status.

Besides income, lenders must consider a borrower’s current liabilities. That includes any outstanding debts that they are still paying, as well as other monthly payments such as child support. A lender will also check a borrower’s credit history and consider their debt-to-income ratio in order to make a final determination.

Some mortgages are exempt from the ability to repay rule. Some of these loans include timeshare plans, home equity lines of credit, bridge loans, a construction phase of less than a  year and reverse mortgages.