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Consumer Financial Protection Bureau (CFPB) | Technical Definition of Ability-to- Repay

 

Qualified Mortgages (QM)

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To provide clearer standards and reduce uncertainty, the CFPB created a regulatory category of loans known as Qualified Mortgages (QM loans). These loans follow certain basic requirements designed to show the borrower can afford the loan:

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• Income and debts are verified

• Monthly payments are designed to be affordable

• Risky loan features are generally avoided

• Fees and costs are limited

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When a loan meets the Qualified Mortgage standards, it is generally presumed to comply with the Ability-to-Repay rule, providing lenders with some added legal protection. Loans that do not meet these standards are often referred to as non-QM loans. [2]

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The CFPB requires lenders to consider, among other factors:

• Current or reasonably expected income or assets

• Current employment status (if income is employment-based)

• Monthly payment on the covered transaction

• Monthly payment on any simultaneous loans secured by the same property

• Monthly mortgage-related obligations (taxes, insurance, HOA fees)

• Current debt obligations, alimony, and child support

• Monthly debt-to-income ratio or residual income

• Credit history

 

 

Breaking It Down in Plain Language

 

In very simple generic terms, a bank must make sure a borrower can afford a mortgage before approving it. This means the bank must look at real financial information — not guesses — such as how much the borrower earns, what bills they already have, and what the new house payment will be.

The lender usually must verify this information with documents like pay stubs, tax returns, bank statements, and credit reports. The rules do not require one exact math formula for every loan or every institution, but they must use reasonable judgment based on the verified information in order to be a Qualified Mortgage (QM).

 

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The CFPB does not require lenders to provide a separate or special disclosure stating whether a loan is a Qualified Mortgage or a non-Qualified Mortgage. Instead, all mortgage loans—regardless of QM status—must follow the same standard TILA-RESPA Integrated Disclosure (TRID) requirements. [3, 4, 5]

 

These required disclosures include the Loan Estimate and Closing Disclosure forms, which outline key loan terms, interest rates, monthly payments, and closing costs.

 

Related Expertise

Elder Financial Exploitation

Consumer Real Estate Compliance

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For more information or clarification on this subject, you may visit this Holland and Knight Law Firm publication.

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References

[1] 12 C.F.R. §1026.43(c); CFPB Ability-to-Repay and Qualified Mortgage Rule (Regulation Z).

[2] 12 C.F.R. §1026.43(e); CFPB Qualified Mortgage standards and legal protections.

[3] 12 C.F.R. §1026.19(e)-(f); TILA-RESPA Integrated Disclosure (TRID) Rule.

[4] 15 U.S.C. §1640; 12 C.F.R. §1026.43(k) (civil liability and recoupment provisions).

[5] Dodd-Frank Wall Street Reform and Consumer Protection Act; CFPB enforcement authority under TILA.

 

Disclaimer

This document is provided for general informational and educational purposes only and does not constitute legal advice, regulatory guidance, or expert opinion regarding any specific matter. References to statutes, regulations, or regulatory guidance are provided for informational purposes only and are not representations or interpretations by Ross Mallioux. Such authorities should be independently verified and reviewed in their current form. This page is intended for attorneys, institutions, and parties seeking independent analysis of banking operations and industry practices in litigation matters. Nothing contained herein should be interpreted as creating an expert-client relationship. Any opinions or services provided by Ross Mallioux are formed solely in connection with a formal engagement and based on the specific facts and circumstances of a particular case.