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Potential for Increased Litigation Risk Under the Ability to Repay Rule for Mortgage Lenders as a Result of the Affordable Care Act

Mon, Mar 17, 2014

Washington, District Of Columbia

The negative financial impact for consumers as a result of the Affordable Care Act (ACA) places mortgage lenders who issue “higher-priced qualified mortgages” at an increased risk of future litigation under the Consumer Financial Protection Board’s (CFPB) “Ability to Repay” rule, which applies to all mortgage loans issued on or after January 10, 2014.   

The CFPB amended Regulation Z, which implements the Truth in Lending Act (TILA). The “Ability to Repay” rule was required to be issued by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), and generally requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling, and establishes certain protections from liability under this requirement for “qualified mortgages” (defined in §1026.43(e)(2)). However, these “liability protections” are of little comfort, given the language of the rule.

For qualified mortgages that are “higher-priced covered transactions” (defined in §1026.43(b)(4)),
 the rule (specifically §1026.43(e)(1)(ii)(A)), provides a rebuttable presumption of compliance with the repayment ability requirements.  A consumer may rebut this presumption of compliance by proving that, despite meeting the regulatory requirements, “the creditor did not make a reasonable and good faith determination of the consumer’s repayment ability at the time of consummation, by showing that the consumer’s income, debt obligations, alimony, child support, and the consumer’s monthly payment (including mortgage-related obligations) on the covered transaction and on any simultaneous loans of which the creditor was aware at consummation would leave the consumer with insufficient residual income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan with which to meet living expenses, including any recurring and material non-debt obligations of which the creditor was aware at the time of consummation.”

The comment section regarding this provision provides, as an example, that “a consumer may rebut the presumption with evidence demonstrating that the consumer’s residual income was insufficient to meet living expenses, such as food, clothing, gasoline, and health care, including the payment of recurring medical expenses of which the creditor was aware at the time of consummation (emphasis added), and after taking into account the consumer’s assets other than the value of the dwelling securing the loan, such as a savings account…”

As amended by the Dodd-Frank Act, TILA section 130(k) provides that “when a creditor, assignee, or other holder initiates a foreclosure action, a consumer may assert a violation of the ability-to-repay requirements as a matter of defense by recoupment or setoff. There is no time limit on the use of this defense (emphasis added), but the amount of recoupment or setoff is limited with respect to the special statutory damages to no more than three years of finance charges and fees. This limit on setoff is more restrictive than under the existing regulations, but also expressly applies to assignees.”

The ambiguity surrounding the ACA’s financial impact on consumers places mortgage lenders issuing higher-priced qualified mortgages in a precarious position.  The statistics for how high premiums have risen and will rise for the average consumer, as well as the impact of employees under the employer mandate set to take effect on January 1, 2015 (delayed for the second time since the law’s passage), are unknown and often depend on what side of the political spectrum the reports originate.  It is, however, safe to say that if the various “experts” reviewing the law can’t agree on the ACA’s economic impact on consumers, it is highly unlikely that a mortgage lender will be adequately able to make a reasonable and good faith determination regarding a potential borrower’s residual income for health care expenses. The ACA therefore renders the litigation protection afforded under Regulation Z meaningless in this regard. 

Mortgage lenders will need to take a serious look at the litigation risk associated with offering higher-priced qualified mortgages.  Until the costs of the ACA for consumers is clearer, lenders may want to take a serious look at whether to even include these products as part of their lending portfolios. 

Lenders concerned about fair lending claims as a result of such a decision can look to the “Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule” (Statement) dated October 22, 2013 for guidance. In this Statement, the federal regulatory agencies (which included the NCUA), concluded that “(they) do not anticipate that a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.”  In addition, “the Agencies understand that implementation of the Ability-to-Repay Rule, other Dodd-Frank Act regulations, and other changes in economic and mortgage market conditions have real world impacts and that creditors may have a legitimate business need to fine-tune their product offerings over the next few years in response.”