The ATR/QM Rule: What It Is And What Borrowers Should Know

Starting your journey to homeownership can be complicated at first. Thankfully, when you’re approved for a mortgage, you can expect the loan terms to be fair and favorable to you – due in large part to the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule).

The current ATR/QM Rule helps make mortgages more accessible while still holding lenders accountable. This information can be complex, so let’s carefully examine how the ATR/QM Rule supports consumers like you.

The Ability-To-Repay/Qualified Mortgage Rule (ATR/QM Rule), Explained

The ATR/QM Rule requires institutions, individuals and groups to make a “reasonable and good faith determination” of a consumer’s ability to repay a loan according to its terms. This must happen before the lender creates a residential mortgage.

If a lender doesn’t follow the ATR/QM Rule, borrowers may have more legal protection against foreclosure. That’s because these lenders could be viewed as not sufficiently protecting their borrowers.

The ATR/QM Rule also sets in place other provisions that limit prepayment penalties and enforce record-keeping up to 3 years after both parties sign the loan contract.

What Do ‘ATR’ And ‘QM’ Stand For?

ATR stands for “ability to repay.” QM stands for “qualified mortgage.” A QM is a mortgage that meets certain requirements established by the Consumer Financial Protection Bureau (CFPB).

These requirements make it more likely that you’ll get a mortgage with repayment terms that are fair to you. In addition, it becomes more likely that you’ll maintain the ability to repay your mortgage in the long term.

The ATR/QM Rule From The Beginning: A Brief History

In 2010, Congress signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly known as the Dodd-Frank Act. Dodd-Frank amended the 1968 Truth in Lending Act (TILA), otherwise referred to as Regulation Z.

The Dodd-Frank Act reformed the financial system and added new government agencies to carry out these reforms. The goal was to help avoid another financial crisis like the one that occurred in 2008.

Multiple provisions from Dodd-Frank took effect over several years, including the ATR/QM Rule. Some provisions and features, like Temporary GSE (government-sponsored enterprise) QMs – which include loans sold through entities like Fannie Mae or Freddie Mac – have changed over time.

Updates To The ATR/QM Rule

The ATR/QM Rule was updated to protect consumers without overly limiting mortgage approvals. Many changes addressed the “GSE Patch,” which allowed borrowers who might not have qualified based on their debt-to-income ratio (DTI) to move forward if their loans were eligible for purchase or guarantee by Fannie Mae and Freddie Mac.

Amended General QM Rule

The Amended General QM Rule replaced the DTI Limitation with a newer limitation based on the APR (annual percentage rate) Limitation. Compared to the 43% DTI limit, the APR rule caps qualifying loans at 2.25 percentage points above the average prime offer rate (APOR) for a comparable transaction.

In effect, this requires the creditor to consider the borrower’s present and reliable future income – outside of their real property – as well as debts. The DTI limit potentially reduced credit access for borrowers with a good credit standing, particularly low-to-moderate-income individuals.

Seasoned QM Rule

The Seasoned QM Rule was added to protect non-QMs and higher-priced QMs from liability as long as they meet certain requirements, and the originating lender holds the loan in its portfolio for 36 months. This means that lenders are not as legally vulnerable, regardless of whether their loan was originally a QM.

The rules for defining a Seasoned QM as a loan include:

• Secured by a first lien
• Not a high-cost mortgage
• Having a fixed interest rate
• At least 36 months in the portfolio of the original creditor or purchaser

The CFPB chose 36 months based on the reasoning that the earlier the delinquency, the more likely it is that the consumer couldn’t pay the loan from the start. That’s different from defaulting as a result of a change in circumstance.

What Is Considered A ‘Qualified Mortgage’?

A loan must meet several standards to be considered a qualified mortgage under the ATR/QM Rule. First, it must avoid risky loan features, such as:

• Negative amortization
• A term longer than 30 years
• Balloon or interest-only payments
• Fees that typically exceed 3% of the full loan amount

In general, avoiding these terms or features is thought to make a loan safer and more stable for borrowers.

Secondly, the creditor underwrites terms for the loan based on predetermined criteria. These conditions should indicate that the borrower can reasonably and safely repay their mortgage. More than anything, it’s vital for the lender to find the consumer financially stable. Your lender may look at your current income or total assets, DTI, debt obligations, employment and credit history.

You can identify a QM under one of four categories: general, temporary, small creditor and balloon payment. Any creditor can originate general and temporary QMs. However, only small creditors can originate small creditor and balloon-payment QMs under the ATR/QM Rule.

What Borrower Protections Are Offered Under ATR/QM?

When a creditor makes a good faith determination, they must verify the information through reliable sources. This may include third parties with a consistent and dependable reporting system. By following the standard underwriting requirements for the ATR Rule in this way, they ensure the borrower has the finances to repay the mortgage.

The evaluation relies on at least eight factors, including:

• Current or reasonably expected income or assets
• Current employment status and verified income
• Loan payment amount
• Any simultaneous loans secured by the same property
• Ongoing expenses related to the property
• Additional debt
• DTI
• Credit history

The lender can consider additional conditions if they choose.

What Doesn’t Fall Under The ATR/QM Rule?

The ATR/QM Rule applies to almost every mortgage loan. However, exemptions exist, and transactions outside that definition aren’t covered under the ATR/QM Rule. For example, borrowing against your home’s equity through a reverse mortgage falls outside the Qualified Mortgage Rule.

Other exemptions include:

• Very short-term bridge loans, which provide short-term financing
• Some types of loan modifications (versus certain forms of refinancing)
• Time-share plans
• Open-end credit plans (like home equity lines of credit)
• Construction periods with terms under 12 months
• Consumer credit transactions secured by vacant land

The rule also creates an exemption for refinancing nonstandard homeowners loans into standard loans. However, this only applies if you continue to hold the loan and it meets specific conditions after refinancing.

Additionally, some loans offered through particular creditors or loan programs may be exempt under certain conditions.

The Bottom Line

The ATR/QM Rule works to protect borrowers by holding lenders to higher standards. Moreover, this rule does so without compromising a consumer’s access to credit. It encourages appropriate, safe lending and innovation. The Dodd-Frank Act has undergone several revisions and amendments since Congress signed the legislation into law. Therefore, it’s always a good idea for any aspiring homeowner to stay informed.

If you’re ready to begin the home buying journey, take action and start your mortgage application online today with the Home Loan Experts at Rocket Mortgage^®.