How far does a lender have to go to determine if a borrower has an ability-to-repay his or her mortgage? Yes, while the ability-to-repay rule of Dodd-Frank has standards, there's no telling what sort of allegations will be brought up against a lender if a borrower happens to default.
But as we learned at the ABS Vegas 2014 conference this week, when you ask how far lenders have to go to verify a borrower's veracity on documents, the hypothetical answers thrown around are amusing.
At a panel on non-traditional mortgage investments, where normally the focus is on nonperforming loans, servicing performance, and the like, an interesting question about the ability-to-repay rule came up.
"How far does it go?" asked Anthony Sepci, partner at KPMG. "Do lenders have to go and interview the HR manager to ensure the applicant is doing well at his job, or follow someone through their rehab for their drug habit? How far do they have to dig and what's the legal aspect?"
Charles Gelinas, a partner with Dentons, said the potential for litigation is great because there's no way of knowing what precedents the courts could set and there's a lot open for interpretation.
Luke Scolastico, a director with Credit Suisse, said, "I don't think there's anyone here who likes the new rule. Unless there are regulators in here, in which case we do. The fact is there is a rule in place now and we have to work with it and recognize the positive aspects where it benefits the consumers and the lenders."
Meanwhile, credit ratings agency Standard & Poor's released its revised methodology for mitigating the risks in ability-to-repay and qualified mortgage rules. This will only be applied to new residential mortgage backed securities.