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Fair Credit Reporting: 3.3.10.2 Scope of Obligation

The obligation to provide a credit score is imposed on the CRA.279 Thus, one court has held that a CRA was not liable for “blocking” a consumer’s access to her credit score from that CRA, because the consumer had made the request to Fair Isaac’s website and not directly to the CRA.280 The CRA may not condition the sale of credit scores on the purchase of another product,281 such as any “credit monitoring” services.

Truth in Lending: 9.3.3.4.1.1 General definition of qualified mortgage

A major feature of the ability-to-repay requirement is the establishment of a category of safer loans. The Act defines them as “qualified mortgages” and grants loans meeting such standards a presumption of compliance with the ability-to-repay requirement. The presumption becomes irrebuttable if a loan meets the CFPB’s specified “safe harbor” threshold.214 This presumption seeks to limit the risky practices and faulty underwriting that contributed to the financial crisis that preceded the passage of the Dodd-Frank Act.

Truth in Lending: 9.3.3.3.5 Standards for nontraditional mortgages

For loans not eligible for the presumption of affordability that applies to “qualified mortgages,”175 the Consumer Financial Protection Bureau (CFPB) allows creditors to rely on the fully indexed rate (or an introductory interest rate, if it is greater than the fully indexed rate) in calculating the affordability of payments for adjustable rate mortgages.176 The affordability of both negatively amortizing and interest-only loans must be assessed using fully amortizing payments, regardless of

Truth in Lending: 9.3.3.4.1.7 Department of Agriculture Rural Housing Service (RHS) guaranteed loans final rule

The Department of Agriculture finalized its qualified mortgage rule that applies to RHS single family guaranteed mortgage loans, effective June 2, 2016.277 To be considered a qualified mortgage loan, a RHS loan must meet the underwriting requirements of the RHS and the qualified mortgage rules of the CFPB found in Regulation Z §§ 1026.43(e)(2)(i) through (iii) and 1026.43(e)(3).278 The RHS regulation makes no distinction between a safe harbor loan and a rebuttable presumption loan.

Truth in Lending: 9.3.3.3.6 Standards for open-end HOEPA loans effective January 2014

Effective for applications received on or after January 10, 2014, the ability-to-repay rules for open-end and closed-end HOEPA loans will diverge slightly.181 Closed-end high-cost mortgages and higher-priced mortgages are subject to the general ability-to-repay restrictions contained in Regulation Z § 1026.43.182 The ability-to-repay standards for open-end high-cost mortgages are in Regulation Z § 1026.34(a)(iv).

Truth in Lending: 9.3.3.3.1 General

Creditors making closed-end home-secured credit, excluding timeshares, bridge loans, reverse mortgages, and certain mortgages made under government programs or by nonprofit organizations,147 must make “a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability-to-repay the loan according to its terms.”148 That determination must be based on verified income, assets, and debts, including any simultaneous mortgages the creditor “knows or

Truth in Lending: 9.3.3.4.2 Presumption of compliance

Whether the presumption of compliance given to qualified mortgages is rebuttable depends on how expensive the mortgage is: for higher-priced qualified mortgages,300 the presumption of compliance with the Dodd-Frank Act’s ability-to-repay rules is rebuttable; for prime-rate qualified mortgages, the presumption is not rebuttable and the rule provides a “safe harbor” against litigation.301

Truth in Lending: 9.3.3.4.1.3 Debt and income definitions

CFPB’s December 2020 final rule eliminated appendix Q to section 1026 of Regulation Z, which had provided significant detail on how debt and income should be determined for the qualified mortgage analysis of whether the borrower’s total monthly debt-to-income ratio exceeded 43%.240 Issues discussed in Regulation Z’s appendix Q included income from seasonal employment, bonus and overtime income, verification of employment history and income, self-employment and family-owned businesses,241 non

Truth in Lending: 9.3.3.1 Introduction

The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 ushered in a new era in substantive mortgage regulation in response to the preceding financial crisis.127 Congress established a regime for ensuring that homeowners throughout most of the mortgage market can expect to be offered loans that are affordable, based on verified income, and are suitable to the consumer’s credit history.128 The CFPB’s assessment report on the ability-to-repay rule issued in 2019 found that

Truth in Lending: 9.3.3.4.1.9 Seasoned qualified mortgages

The CFPB created a new category of qualified mortgages in the 2020 rule that allow non-qualified mortgages to “season” into qualified mortgages depending on their performance in portfolio over a thirty-six-month period.294 This “seasoned QM” category has been subject to widespread criticism as it provides lenders protection from liability even when they make loans that do not meet qualified mortgage requirements at origination.295 As a result, questions have arisen as to whether the CFPB mig

Truth in Lending: 9.3.3.3.2 What goes into the payment?

The Dodd-Frank Act prohibits a creditor from making a residential mortgage loan without making a reasonable and good faith determination, based on verified and documented information, that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments.163 The taxes and insurance should be those reasonably expected.164 Thus, for home improvement loans, the expected taxes and insurance

Truth in Lending: 9.3.3.3.3 Income and expenses

Considerations for loan affordability must include the consumer’s credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, the debt-to-income ratio or the residual income the consumer will have after paying non-mortgage debt and mortgage-related obligations,167 employment status, and other financial resources other than the consumer’s equity in the dwelling or real property that secured repayment of the loan.168

Truth in Lending: 9.3.3.4.1.5 Department of Housing and Urban Development (FHA) final rule

The Department of Housing and Urban Development issued a final qualified mortgage rule, effective for loans with case numbers assigned on or after January 10, 2014.256 The rule treats FHA insured loans as qualified mortgages, and creates its own thresholds for “safe harbor” and “rebuttable presumption” qualified mortgage status, taking into account FHA insurance premiums.

Truth in Lending: 9.3.3.3.4 Income verification

Under the ability-to-repay rules, all income and assets relied on in making the loan must be verified using reliable third-party information.170 A creditor must verify the information that the creditor relies on in determining a consumer’s repayment ability, including but not limited to income and assets, using reasonably reliable third-party records.171 Income verification allows for review of IRS W-2 Forms, tax returns, payroll receipts, financial institution records, or other third-party

Fair Credit Reporting: 1.1.3.1 The Chapters

Chapter 1 provides an introduction to the treatise; the credit reporting industry; the Fair Credit Reporting Act (FCRA); and the three major amendments to the FCRA: the Consumer Credit Reporting Reform Act of 1996 (1996 Reform Act),4 the Fair and Accurate Credit Transactions Act of 2003 (FACTA),5 and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).6 It also discusses the legislative histories of these Acts.

Fair Credit Reporting: 1.1.3.2 The Appendices

Considerable attention has been given in this treatise to including significant FCRA materials in the appendices and making them available as companion material to the digital version of this treatise. Appendix A, infra, contains the FCRA in its current form.