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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.

Fair Credit Reporting: 1.2.1 Terminology and Convention

The FCRA regulates primarily “consumer reporting agencies” and “consumer reports.”7 A consumer reporting agency includes companies that keep files on the credit histories of consumers, sometimes known as “credit bureaus.” It also includes many other entities such as check approval services, tenant screening bureaus, and employment screening agencies.8 Thus, a consumer report includes credit reports, but it also includes tenant reports, employment reports, and many other types of reports.

Fair Credit Reporting: 1.2.2 About the Industry

The consumer reporting industry is big business. Information about consumers is often sought by banks, other lenders, insurance companies, employers, landlords, and others who use the information to extend credit, underwrite insurance, hire or retain employees, or rent an apartment. The applicant provides some of this information. However, companies called consumer reporting agencies (CRAs) aggregate and store information on individuals and sell it to those who desire it, such as potential creditors, prospective employers, landlords, and insurers.

Fair Credit Reporting: 1.3.1 Overview

The Fair Credit Reporting Act (FCRA)26 is a federal statute that was signed into law in October 26, 1970, and first became effective April 25, 1971. It regulates the activities of consumer reporting agencies (CRAs), the users of reports, and those who furnish information to CRAs (furnishers). The Act also provides remedies to consumers affected by such reports.

Fair Credit Reporting: 1.3.2 FCRA Litigation

Since many consumers are harmed by incomplete and inaccurate consumer reports, any remedies provided by the Act should be explored. For example, consumer reports may make it difficult for consumers to pull themselves out of poverty. A creditor may review reports and raise the interest rate on a loan if a negative item shows up on a borrower’s report, furthering the consumer’s debt load. Landlords with available apartments may rely on consumer reports before agreeing to rent to a new tenant.

Fair Credit Reporting: 1.3.3.1.1 The FCRA’s rulemaking scheme and history

The Fair Credit Reporting Act (FCRA), as originally passed in 1970, did not provide for any rulemaking authority for the Federal Trade Commission (FTC), which was the primary agency charged with its enforcement. In fact, prior to 1999, the FTC was actually prohibited from issuing regulations under the FCRA. In 1999, Congress finally lifted this restriction.52