Ability To Repay

AAA

DEFINITION of 'Ability To Repay'

An individual's financial capacity to make good on a debt. Specifically, the phrase "ability to repay" was used in the

2010 Dodd-Frank Wall Street

Reform and Consumer Protection Act in Title XIV, the Mortgage Reform and Anti-Predatory Lending Act, to describe the requirement that mortgage originators substantiate that potential borrowers can afford the mortgage they are applying for. Originators are required to look at a borrower's total current income and existing debt, for example, to make sure that the existing debt plus the potential mortgage debt, property taxes and required insurance do not exceed a stated percentage of the borrower's income.

BREAKING DOWN 'Ability To Repay'

The purpose of this legislation and the "ability to repay" standard was to prevent lenders from employing the same loose lending criteria used during the housing bubble of the mid-2000s, in which many people were allowed to take out mortgages they couldn't really afford, then lost their homes to foreclosure a few years later. Under the new laws, individuals who are not properly subjected to the ability to repay standard during the origination process may have a defense against foreclosure.

RELATED TERMS
  1. The Great Recession

    The steep decline in economic activity during the late 2000s, ...
  2. Dodd-Frank Wall Street Reform and ...

    A compendium of federal regulations, primarily affecting financial ...
  3. Foreclosure Crisis

    A period of unusually high home foreclosure rates that caused ...
  4. Ability-To-Pay Taxation

    Taxation in the form of a progressive tax. The ability-to-pay ...
  5. Ability To Pay

    An economic principle stating that the amount of tax an individual ...
  6. Housing Bubble

    A run-up in housing prices fueled by demand, speculation and ...
Related Articles
  1. Home & Auto

    Why Housing Market Bubbles Pop

    Home price appreciation is not assured. Can you withstand the volatility in this market?
  2. Home & Auto

    The Truth About Real Estate Prices

    Historical housing price data suggests ongoing increases in housing prices, but these numbers don't tell the whole truth.
  3. Home & Auto

    Closing A Real Estate Deal In A Down Market

    We provide top tips on how to help sell your home in a rough market.
  4. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  5. Economics

    Economic Meltdowns: Let Them Burn Or Stamp Them Out?

    Whether the Fed should intervene in market bubbles is up for debate. Learn about both sides here.
  6. Home & Auto

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares US Real Estate

    Learn about the iShares US Real Estate fund, which holds shares of equity and nonequity real estate investment trusts incorporated in the United States.
  8. Economics

    Will North and South Korea Ever Reunite?

    North and South Korea have been divided for over six decades. Some analysts think the two countries could reunify within the next 10 years.
  9. Economics

    The Top 9 Things to Know About Hillary Clinton's Economic View

    Find out where former secretary of state and Democratic presidential candidate Hillary Clinton stands on the economy, jobs, trade and education.
  10. Economics

    Is Argentina a Socialist Country?

    Find out why it does not really make sense to call Argentina a socialist country, even though the South American nation has many socialistic tendencies.
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. Where are the Social Security administration headquarters?

    The U.S. Social Security Administration, or SSA, is headquartered in Woodlawn, Maryland, a suburb just outside of Baltimore. ... Read Full Answer >>
  3. What is the Social Security tax rate?

    The Social Security tax rate is 12.4% as of 2015. Of that amount, the employee is responsible for half, or 6.2%, and the ... Read Full Answer >>
  4. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  5. How is Social Security tax calculated?

    The Old-Age, Survivors and Disability Insurance program, or OASDI, tax is calculated by taking a set percentage of your income ... Read Full Answer >>
  6. Is the Social Security administration a government corporation?

    The U.S. Social Security Administration (SSA) is a government agency, not a government corporation. President Franklin Roosevelt ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!