Ability to Repay

The CFPB’s final rule (12 CFR §1026.43) describes certain minimum requirements for creditors making ability-to-repay determinations but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors:

A creditor must consider and evaluate at least the following eight factors:

Current or Reasonably Expected Income or Assets (12 CFR §1026. 43(c)(2)(i)). A creditor may base its determination of repayment ability on current or reasonably expected income from employment or other sources, assets other than the dwelling that secures the covered transaction, or both. The creditor may consider any type of current or reasonably expected income, including, for example, the following: salary; wages; self-employment income; military or reserve duty income; bonus pay; tips; commissions; interest payments; dividends; retirement benefits or entitlements; rental income; royalty payments; trust income; public assistance payments; and alimony, child support, and separate maintenance payments. The creditor may consider any of the consumer’s assets, other than the value of the dwelling that secures the covered transaction, including, for example, the following: funds in a savings or checking account, amounts vested in a retirement account, stocks, bonds, certificates of deposit, and amounts available to the consumer from a trust fund.

Current Employment Status. (12 CFR §1026. 43(c)(2)(ii)). Employment status need not be full-time, and employment need not occur at regular intervals. If, in determining the consumer’s repayment ability, the creditor relies on income from the consumer’s employment, then that employment may be, for example, full-time, part-time, seasonal, irregular, military, or self-employment, so long as the creditor considers those characteristics of the employment. Under 12 CFR §1026.43(c)(2)(ii), a creditor must verify a consumer’s current employment status only if the creditor relies on the consumer’s employment income in determining the consumer’s repayment ability. For example, if a creditor relies wholly on a consumer’s investment income to determine repayment ability, the creditor need not verify or document employment status.

Monthly Payments on the Covered Transaction (12 CFR §1026. 43(c)(2)(iii)). The monthly payment obligation is based on the “full” payment. The payment must be considered on a monthly basis and be at the fully adjusted indexed rate or the introductory rate, whichever is higher. In short, teaser rates and other “low” starting rates are not to be considered in the ability-to-repay analysis.

Monthly Payments on a Simultaneous Loan (12 CFR §1026.43(c)(2)(iv)). A simultaneous loan includes any covered transaction or home equity line of credit (HELOC) that will be made to the same consumer at or before consummation of the covered transaction and secured by the same dwelling that secures the covered transaction. A HELOC that is a simultaneous loan that the creditor knows or has reason to know about must be considered as a mortgage obligation in determining a consumer’s ability to repay the covered transaction even though the HELOC is not a covered transaction subject to 12 CFR §1026.43. summation of the covered transaction

Monthly Payment for Mortgage-Related Obligations (12 CFR §1026.43(c)(2)(v)). A creditor must include in its repayment ability assessment the consumer’s monthly payment for mortgage-related obligations, such as the expected property taxes and premiums or similar charges that are required by the creditor. Mortgage-related obligations must be included in the creditor’s determination of repayment ability regardless of whether the amounts are included in the monthly payment or whether there is an escrow account established. Creditors only need to evaluate payment obligations that occur on an ongoing or recurring basis. One-time charges, or obligations satisfied at or before consummation, are not ongoing or recurring and are therefore not part of the consumer’s monthly payment (12 CFR §1026.43(c)(2)(v)).

For example: Assume that a consumer will be required to pay property taxes on a quarterly, annual, or other basis after consummation. 12 CFR §1026.43(c)(2)(v) includes these recurring property taxes in the evaluation of the consumer’s monthly payment for mortgage-related obligations. However, if the consumer will incur a one-time charge to satisfy property taxes that are past due, 12 CFR §1026.43(c) (2)(v) does not include this one-time charge in the evaluation of the consumer’s monthly payment for mortgage-related obligations.

Current Debt Obligations, Alimony, and Child Support (12 CFR § 1026.43(c)(2)(vi)). Creditors must consider a consumer’s current debt obligations and any alimony or child support the consumer is required to pay. Examples of current debt obligations include student loans, automobile loans, revolving debt, and existing mortgages that will not be paid off at or before consummation. Creditors have significant flexibility to consider current debt obligations in light of attendant facts and circumstances, including that an obligation is likely to be paid off soon after consummation. For example, a creditor may take into account that an existing mortgage is likely to be paid off soon after consummation because there is an existing contract for the sale of the property that secures that mortgage

Monthly Debt-to-Income Ratio or Residual Income (12 CFR § 1026.43(c)(2)(vii)). Debt-to-Income is calculated using the total of all of the mortgage and non-mortgage obligations listed above as a ratio of gross monthly income. Residual income is the amount of monthly income that would remain after subtracting the consumer’s monthly debt obligations.

Credit History (12 CFR § 1026.43(c)(2)(viii)). Credit history may include factors such as the number and age of credit lines, payment history, and any judgments, collections, or bankruptcies. 12 CFR §1026.43(c)(2)(viii) does not require creditors to obtain or consider a consolidated credit score or prescribe a minimum credit score that creditors must apply. The regulation also does not specify which aspects of credit history a creditor must consider or how various aspects of credit history should be weighed against each other or other underwriting factors. Some aspects of a consumer’s credit history, whether positive or negative, may not be directly indicative of the consumer’s ability to repay. Therefore, a creditor may give various aspects of a consumer’s credit history as much or as little weight as is appropriate to reach a reasonable, good faith determination of ability to repay. Where a consumer has obtained few or no extensions of traditional “credit,” a creditor may, but is not required to, look to nontraditional credit references, such as rental payment history or utility payments.