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Ability To Repay Rule – A Lesson In Removing Personal Responsibility

Personal ResponsibilityThere are some things in this life that are more important than others. Through my 51 years on this earth, I have learned that personal responsibility is one of those things. If we refuse to take responsibility for our actions, we are apt to go through this life with an attitude of entitlement. If we perform an action, knowing full well it is wrong, we will then expect someone else to take the blame, to bail us out, and to fix the problem.

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I have seen this first hand. The automotive shop I work at installs a device to prevent people from driving after they have been drinking alcoholic beverages. Some of the clients are older, but many of them are teenagers. To be sure, the device we install is meant to be inconvenient. It costs a lot of money and it is totally aggravating to drive a vehicle with one of them installed. The device has to be re-calibrated once each month, but many times the client has to return earlier than their original appointment because they have done something to cause the device to start counting down the days before it locks up and prevents the car from starting. Almost invariably, the parents of these teenagers are the ones who undergo the inconvenience and the cost of returning to the shop to have the service performed. We have noted many times that the person who was convicted of driving under the influence was learning only one thing from the experience. They became fully aware of just how far their parents would go to protect them from their own actions.

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My apologies for the long story, but it serves the purpose to highlight how important personal responsibility is in America and just how lacking it is. Another case in point is the new rules that were issued this past January by the Consumer Financial Protection Bureau. They are set to take effect January 10, 2014. The new rules are supposed to protect home buyers from the unscrupulous lending practices that supposedly led to the crash of the housing market that caused so much grief toward the end of the Bush administration.

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To be sure, there were some very bad loans issued. Some of that was because of bad lending practices, but some of it was also due to people not taking personal responsibility for the loans they obtained and the government’s unwillingness to let these people suffer the consequences. At the time, there was a major push by our government to make sure low-income borrowers were able to purchase a home. It was considered to be of the utmost importance. Supposedly, these new rules will prevent all that from happening again. However, when you look at one of the new rules in particular, something troubling comes to light.

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This new rule is called the Ability to Repay Rule. I want to share with you a description of exactly what the rule establishes. I have added emphasis to point out what you should pay attention to.

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The Heritage Foundation –  The cornerstone of the mortgage regulations finalized on January 30 by the CFPB is a lender obligation to “make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms.” This ability-to-repay provision is more than a procedural requirement. It is the basis of an expansive new consumer right to sue lenders for miscalculating their financial fitness for a loan.

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Under the new regime, a borrower may sue a lender within three years of an alleged violation, such as improperly documenting income or assets, or incorrectly calculating the borrower’s financial obligations. Those who prevail may recover damages equal to the sum of all finance charges and fees paid—potentially tens of thousands of dollars.

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A borrower may also assert a violation of the ability-to-repay requirement as a defense against foreclosure—even if the original lender sold the mortgage or assigned it to a servicing firm. (The lawsuit may ensnare an assignee or holder of the mortgage, as well.) If successful, the borrower may recover all mortgage finance charges and fees paid in addition to actual damages; damages in an individual action or class action; and court costs and attorney fees.

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The obvious consequence of this new cause of action will be more litigation and less credit availability. No longer will borrowers who wish to contest foreclosure have to initiate a lawsuit against the lender. This will reduce borrowers’ legal costs and thus increase the incentive to claim a violation of the ability-to-repay requirement in the event mortgage payments become burdensome. A new prohibition on pre-dispute arbitration also is expected to “dramatically increase the litigating of disputes which would have otherwise been resolved by arbitration.”

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What this rule does is simple. A prospective home buyer can apply for a loan. They are tasked with supplying the documents to prove they have the ability to pay back the loan. The lender is responsible for making sure their documents substantiate their claim, thus laying a foundation for the loan. If that is established, the loan will probably be granted. Up to three years after the loan is made, the borrower can sue the lender for failing to make sure the borrower would be able to pay back the loan. Thus, much of the personal responsibility is removed from the back of the borrower and placed directly on the institution that was unfortunate enough to grant them the loan. They will also be able to use this defense to prevent foreclosure of said loan and property.

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Someone a lot smarter than I am is going to have to explain how this does anything but enable the same kind of practices that brought the housing market to its knees in 2008. Anyone care to take a shot?

About LD Jackson

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LD Jackson has written 2053 posts in this blog.

Founder and author of the political and news commentary blog Political Realities. I have always loved to write, but never have I felt my writing was more important than in this present day. If I have changed one mind or impressed one American about the direction our country is headed, then I will consider my endeavors a success. I take the tag line on this blog very seriously. Above all else, in search of the truth.

  • Cindy Doyle

    So now, I guess mortgage companies will have to go in to the family budgeting business. They’ll have to figure out how the borrower should spend every penny they make in order to be able to pay the mortgage. Then, the borrower will need to sign a contract and agree to how the mortgage company advises them to spend their money. That is the only way I can see that the mortgage company can get out of a law suit. Yep, just more paperwork, contracts, and control for EVERYONE trying to buy a home due to those people who don’t take the personaly responsiblity to take care of themselves.

    • I think you’ve summed it up nicely. I see nothing good coming out of this rule, unless you happen to be aiming to get out of foreclosure or repaying the loan you signed for. Personal responsibility is being tossed under the bus, yet again.

  • I read an article about the new rules on the Credit Union Times website and I still don’t follow it. The only thing I took from it is that credit union trade organizations and some members of Congress made efforts to delay implementation of the new rules. To my thinking, if this administration is making changes to the rules, it can’t be anything good.

    • I understand both sides of a loan need to be responsible about their actions, but this rule makes no sense to me. It seems completely counter productive.

  • Nom Deplum

    Personal Responsibilities?

    Are you now advocating Banksters should be held accountable/responsible for meeting their honest fiduciary duties in their lending practices? This is shocking. Are you not one of the anti-Obama people who try to wreck ACA by telling young healthy persons to avoid their personal responsibility by not signing up for ACA, paying the minor annual penalties, and only worrying about health care costs when they are sick and in need?

    Ben Gazi

    • What I am questioning is the intelligence of allowing people who borrow money to sue the lenders for not making sure the borrowers could repay the loan. A lender doing their fiduciary duty is one thing. This rule is quite another. It removes the personal responsibility that should rest with the borrower and places it directly on the shoulders of the lender. That is counter productive, is it not?

  • What I see coming is that the America dream will change from owning a nice little house with a white picket fence to renting a nice little house with a white picket fence.

  • I would take a shot Larry but like you I am waiting for the explanation.

  • Banks are forced to give some of those bad loans. Sounds like a wealth redistribution scheme.

  • In my years on earth I’ve made more than my share of mistakes. These have included having too much to drink (I’m a teetotaler now) and borrowing money I should not have. Both got me into trouble on occasion. But NEVER did it occur to me that it was the bartender’s or the lender’s fault!

    It’s no secret that many parents today coddle and hover over their children. Organized sports programs have replaced sandlot baseball and pickup basketball games. There are now “play-dates” rather than finding neighborhood friends to play with. Now it seems this is extending to the world of adult mortgages.

    Good post, Larry. We can’t and shouldn’t return to the good old days, but we should preserve the values of self-responsibility that have served us so well.

    • I believe there are ways to prevent the American housing market from traveling down the same rat hole. There are things that should be done to safeguard borrowers and lenders. This rule is not included in that list. It will do nothing but cause more grief and heartache and financial burdens. The reasoning of it all is more than a little suspect.