Glossary
What is ability to repay?
Ability to repay in consumer vs commercial lending
For residential mortgages, ability to repay is a codified legal standard under the Truth in Lending Act (TILA) and Regulation Z — lenders must make a reasonable, good-faith determination of repayment ability before originating a loan. Qualified Mortgage (QM) rules provide a safe harbor.
For commercial lending (including MCA and equipment finance), there is no single federal ATR statute, but the underlying principle — does the business generate enough cash flow to support this obligation — is fundamental to sound underwriting and increasingly expected by regulators and investors.
How it is assessed in SMB lending
Common methods include: bank statement analysis (average monthly deposits vs proposed remittance), DSCR calculations, review of existing debt obligations, and verification of revenue consistency. The goal is a documented basis for the repayment conclusion, not just a gut check.
FAQ
Ability to Repay — common questions
Does ability to repay apply to MCA products?
There is no federal ATR statute that directly applies to MCA as currently structured. However, regulators have scrutinized whether funders adequately assess repayment capacity — and UDAAP risk exists if a funder extends advances it knows or should know a business cannot repay.
What documentation supports an ability-to-repay conclusion?
Typically: bank statements, tax returns or profit/loss statements, a review of existing obligations, and a documented analysis connecting the evidence to the repayment conclusion. The evidence graph in Hadrian stores this chain.
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