Final answer:
The Ability-to-Repay law ensures lenders only provide loans to consumers who can afford them, but it does not apply to risky loans like zero-equity home loans and those with adjustable-rate mortgages (ARMs), common before the crisis.
Step-by-step explanation:
The Ability-to-Repay law is designed to prevent the lending practices that contributed to the housing crisis by ensuring that lenders only make loans to consumers who can afford them.
This law does not apply to certain high-risk loan types that were common prior to the crisis, such as zero-equity home loans and loans bundled with adjustable-rate mortgages (ARMs).
These loans were often made without thorough checks on the borrower’s ability to repay, and were targeted at individuals with limited financial knowledge. Often, the risks associated with ARMs were not fully disclosed, leading to significant financial trouble for the homeowners when interest rates increased.