After the 2008 financial crisis and the passage of Dodd-Frank, the newly formed Consumer Financial Protection Bureau (“CFPB”) began writing regulations that, among other things, aim to protect borrowers from predatory lenders. This post will explore the so-called “ability to pay” provisions of these regulations, which require that a lender certify a borrower has the resources to repay a loan before the lender issues it. Contract Cloud’s platform helps lenders ensure that they are doing everything necessary to comply with these new regulations.
Before January 10, 2014, borrowers had no legal recourse against lenders who issued mortgages to homebuyers who couldn’t afford them. In other words, a borrower couldn’t file a lawsuit against a lender complaining that the mortgage couldn’t reasonably be repaid. There was no federal law prohibiting issuing mortgages to borrowers regardless of the borrower’s ability to repay the mortgage.
However, because of the CFPB regulations, lenders must now ensure that borrowers have the ability to repay their mortgages before they can issue a loan. If a lender fails to do so, a borrower may, within three years of the loan’s consummation, file a lawsuit claiming the lender failed to consider and verify the borrower’s ability to repay the mortgage. These risks also create issues for potential purchasers of these mortgages on the secondary market.
The lawsuits could prove to be very damaging to lenders in non-compliance with the new regulations. A successful lawsuit under the ability to repay regulations could result in statutory damages equaling up to three years’ worth of finance charges and fees, as well as actual damages, court costs, and attorney’s fees. A borrower may also assert a violation of the ability to repay rules in a defense to a foreclosure action at any point in the mortgage’s term. A borrower’s increased legal rights under the ability to repay rules will force lenders to perform their due diligence in order to ensure that mortgage loans are issued only to borrowers who exhibit an ability to repay.
Contract Cloud can help. Contract Cloud’s customizable, easy-to-use platform allows lenders to record audiovisual evidence of borrowers attesting their ability to repay mortgages, thus strengthening lenders’ defenses against borrowers’ claims of non-compliance. Contract Cloud should be on any lender’s list of compliance and risk management tools. Visit Contract Cloud for more information and to talk to a representative about how we can help lenders comply with the new CFPB regulations.