The ATR/QM rule is an amendment to the Truth in Lending Act (Reg Z) that
requires a lender to make a reasonable and good-faith determination that
the consumer has a reasonable ability to repay the loan. The lender should
make this decision before or during consummation of a mortgage loan. This
determination considers a variety of factors, including the consumer’s
income, assets, and employment status. The lender then weighs the asset
factors against other factors, such as the mortgage loan payments, ongoing
expenses related to the mortgage loan or property (e.g. property taxes,
insurance), payments on simultaneous loans that may be secured by the
same property and other debt obligations like student loans or child-support payments.
The rule also requires lenders to evaluate and verify the consumer’s
credit history in addition to the above factors. If the lender originates
Qualified Mortgages ("QM"), there is already a presumption that
they are complying with the ATR rule. QMs generally cannot contain risk
factors, such as allowing interest-only payments. Additionally, QMs limit
the amount of points and fees that can be charged. For a loan to be a
QM, it must also meet specific underwriting criteria.
The rule, issued by the Consumer Financial Protection Bureau ("CFPB"),
took effect on January 10, 2014, and applies to most closed-end consumer
credit secured by a dwelling and any real property attached to that dwelling.
Unlike some other mortgage rules, the ATR/QM rule is not limited to first
liens or loans on primary residences. However, some specific categories
of loans are excluded, such as open-ended lines of credit, time-share
units, and construction loans with less than 12 month development plans.
The ATM/QR rule also requires that lenders retain evidence of compliance
with the rule for three years after consummation of the loan, though banks
may want to keep such documentation for longer periods of time.
Required Underwriting Factors for the ATR Analysis
A reasonable and good faith ATR evaluation must consider the following
eight underwriting factors:
- Current or reasonably expected income and assets (not including the value
of the home that secures the loan) that the consumer will rely on to repay the loan.
- Current employment status if the lender is relying on employment income
when assessing the consumer’s ability to repay the loan.
- The monthly mortgage payment of the loan.
- The monthly payment on any simultaneous loans that are secured by the same property.
- Monthly payments for property taxes and insurance that the consumer is
required to pay.
- Other debt obligations.
- The monthly debt-to-income ratio of the consumer.
- Credit history.
While the rule does not preclude the lender from taking into account additional
factors, they must consider the above eight criteria at a minimum. Banks
generally cannot rely on what consumers tell them to verify the above
factors. For example, underwriting cannot approve the loan based on what
the consumer states their income is. The lender must confirm the data
with documents such as a W2 or bank statement. Lenders can also validate
a consumer’s debt obligations through the use of a credit report.
Some examples of reasonably reliable third-party records include those
from government agencies, statements for student loans, and payroll stubs.
The ATR/QM rule was designed to protect consumers, but lenders can also
benefit from the rule. Lenders that make QMs receive legal protections
even if the borrower fails to repay the loan, and lenders get a “safe
harbor” for loans that have a low interest rate. If the loan meets
the QM criteria, the lender is considered to be in compliance with the
ATR rule. As lenders begin to see the benefits that are derived from making
Qualified Mortgages, they will have a better understanding of the importance
of complying with the rule.