Dodd-Frank Wall Street Reform and Consumer Protection Act

Dodd-Frank is the 2010 federal law passed after the financial crisis. Its ability-to-repay and qualified mortgage rules require lenders on consumer mortgages to verify that borrowers can afford the loan. DSCR loans exist as non-QM, business-purpose loans that fall outside those rules.

The ability-to-repay rule, implemented under Regulation Z, requires consumer mortgage lenders to document and verify income, assets and debts. Qualified mortgages that meet its standards get legal safe harbor. Loans that do not are non-QM and carry more liability for the lender.

Credit extended primarily for business purposes, including a loan to buy or refinance a rental the borrower will not occupy, is exempt from Regulation Z. That exemption is why a DSCR lender can skip income verification and why DSCR loans carry features consumer loans cannot, such as prepayment penalties. It is also why you cannot live in a DSCR-financed property.

Further reading: Dodd-Frank Wall Street Reform and Consumer Protection Act on Wikipedia.