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.

INVESTOPEDIA EXPLAINS '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 FAQS
  1. In what types of economies are regressive taxes common?

    Regressive taxation systems are more likely to be found in developing countries or emerging market economies than in the ... Read Full Answer >>
  2. What's the difference between regressive and progressive taxes?

    The U.S. federal tax system and local and state tax systems are complex in that they combine progressive, regressive and ... Read Full Answer >>
  3. What are the differences between regressive, proportional and progressive taxes?

    Tax systems fall into three main categories within the tax code: regressive, proportional and progressive taxes. Regressive ... Read Full Answer >>
  4. What causes politicians or governments to begin "pork barrel" spending?

    Pork barrel spending occurs when the government taxes the general population to hand out concentrated benefits to special ... Read Full Answer >>
  5. What are some examples of a value added tax?

    A value-added tax (VAT) is a consumption tax levied on products at every point of sale where value has been added, starting ... Read Full Answer >>
  6. What do mortgage lenders use the securitization food chain?

    The phrase "securitization food chain" was made popular by director Chris Ferguson in "Inside Job," a film about the 2007-2 ... Read Full Answer >>
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. Economics

    How The GDP Of The US Is Calculated

    The US GDP may not be a perfect economic measure, but the ability to compare it to prior periods and other countries makes it the most applicable.
  7. Taxes

    Are Taxes the Solution for Income Inequality?

    Income inequality continues to increase. Why? And are taxes the solution?
  8. Credit & Loans

    Is it Worth Saving Up for a Bigger Down Payment?

    There are numerous low-down-payment mortgage options out there, but sometimes it makes sense to build up your savings so you can borrow less.
  9. Taxes

    Presidential Candidates And Wall Street In 2016

    Wall Street's influence will play a large role in the 2016 presidential race. As election season begins, candidates are showing their true colors.
  10. Economics

    Presidential Candidates For Students In 2016

    Early 2016 Presidential candidates are already making clear their intended strategies for solving the country's growing student loan debt issues.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center