What does the 'ability-to-repay' rule require lenders to do?

The 'ability-to-repay' rule is a fundamental requirement implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act. It mandates that lenders must evaluate and verify a borrower's ability to repay the loan according to their financial situation. This rule is designed to prevent lenders from issuing loans that borrowers cannot reasonably afford to repay, thereby reducing the risk of default and foreclosure.

To comply with this rule, lenders assess various factors related to the borrower's financial status, including income, employment history, credit history, and existing debts. By verifying a borrower’s ability to repay, lenders ensure responsible lending practices that protect both the financial institution and the borrower from the consequences of unsustainable debt. This focus on borrower capability aims to stabilize the mortgage market and contribute to the overall integrity of lending practices within the mortgage industry.