What constitutes a “reasonable” ability-to-repay determination when making a mortgage loan? Since the CFPB’s Ability-to-Repay rules became effective in 2014, the clearest answer to that question is that making a qualified mortgage (“QM”) complies (or is presumed to comply) with those rules. However, mortgage lenders serving the non-QM market have few specifications for how they must meet that “reasonable” standard. A recent complaint the CFPB filed against a mortgage lender, alleging that the lender failed that standard, does not add much clarity – only that the agency believes the determination should not be based on “unreasonable,” “implausible,” or “unrealistic” analyses.
On January 6, 2025, the CFPB sued a company that offers manufactured home financing. The agency alleges that the company failed to comply with its obligations under the Truth in Lending Act and Regulation Z to make reasonable ability-to-repay determinations when offering those mortgage loans.
The CFPB’s Ability-to-Repay rules provide that mortgage lenders may either make QMs (which have relatively strict underwriting and pricing parameters), or lenders may opt for more underwriting flexibility so long as they consider the borrower’s debt-to-income ratio (“DTI”) or residual income, credit history, and other enumerated factors. Beyond that, the requirements for non-QM lending expressly do not mandate specific underwriting standards – they “do not specify how much income is needed to support a particular level of debt or how credit history should be weighed against other factors.”
In the CFPB’s recent lawsuit, the agency accuses a lender of using a residual income model based in some instances on an estimated amount of monthly expenses, and that the estimated expense model was unreasonable. The agency also asserts that the lender did not appropriately consider the borrowers’ lack of assets, the degree to which the borrowers had debts in collection, or the borrowers’ family size. The agency’s complaint also appears to indicate that rates of delinquencies and defaults were evidence that the lender’s ability-to-repay determinations were unreasonable, and that the lender “ignored clear and obvious red flags.”
While the CFPB implies that the lender should have known that certain borrowers could not reasonably repay their loans, and that the lender’s underwriting principles were therefore inadequate, the CFPB has offered little firm guidance on boundaries for non-QMs. In 2016, the CFPB objected to the use of internet-based income estimates, even though the lenders were primarily relying on the borrowers’ assets, and not their income, to determine repayment ability. In 2017, the CFPB objected to lenders’ consideration of the size of the borrowers’ down payment as an asset for purposes of the required repayment determination. Then, in the course of the agency’s reconsideration of its Ability-to-Repay rules and its QM parameters, the agency addressed reliance on bank statements, commenting that reliance on unidentified deposits into a consumer’s account, without confirmation that the funds constitute income, does not comply with the regulation’s verification requirements. Beyond those admonishments, however, the CFPB has not provided specific guidance for complying with the Ability-to-Repay rules for non-QMs.
As the CFPB raced toward today’s change in administration, the recent lawsuit against the manufactured home lender could fall into the regulation-by-enforcement critique. Based solely on the complaint, we know only that the CFPB found that unreasonable analyses may not lead to reasonable ability-to-repay determinations. Of course, the new administration will decide whether or not to continue pursuing the action.