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

Starting your journey to homeownership is exciting, but it’s important to be aware that a lender won’t approve you for a mortgage loan unless you can afford to repay it. Thankfully, when you are approved, 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 Consumer Financial Protection Bureau’s final rules revising the ATR/QM Rule make mortgages more accessible while still keeping lenders accountable. This information can be complex, so let’s carefully examine how the ATR/QM Rule supports consumers like you.

The ATR/QM Rule requires institutions, individuals and groups to make a “reasonable and good faith determination” concerning 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 in advance.

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.

A Brief History Of The ATR/QM Rule

In 2010, Congress signed into law a large piece of legislation called 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. In short, the Dodd-Frank Act reformed the financial system and added new government agencies to carry out these reforms with the goal of helping the country 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 make sure it protected consumers without overly limiting mortgage approvals. Many changes addressed the “GSE Patch,” which expired on October 1, 2022 and allowed borrowers who might not have otherwise qualified based on their DTI to move forward if their loans were eligible for purchase or guarantee by enterprises like Fannie Mae and Freddie Mac. The expiration of the patch could’ve created problems for the availability of mortgage credit, but the Consumer Financial Protection Bureau (CFPB) published amendments revising the ATR Rule to preempt these and other possible issues.

Amended General QM Rule

The Amended General QM Rule completely replaced the DTI (debt-to-income) Limitation with a newer limitation based on price called 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. In connection to that, the CFPB believes that the DTI limit potentially reduced credit access for borrowers with a good credit standing, particularly low-to-moderate-income individuals.

Replacing the DTI limit with the APR limit also helped remove the need for a “patch” for GSEs like Fannie Mae and Freddie Mac.

Appendix Q

Originally, Appendix Q set the standards for considering a consumer’s monthly debts and income. But many argued Appendix Q was too strict and complicated, so it was removed. The new APR limit allows lenders to use the same standards that Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) use.

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 lender that originated the loan holds the loan in its portfolio for 36 months. In other words, lenders who provide mortgages that meet core requirements are now typically not as legally vulnerable, regardless of whether their loan was originally a QM.

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

• It being secured by a first lien
• It not being a high-cost mortgage
• It having a fixed interest rate
• The original creditor or purchaser holding the loan in its portfolio for at least 36 months

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 is in contrast to the concept of defaulting as a result of a change in circumstance.

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
• A 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. Among the personal details a lender may look at to decide this include your current income or total assets, debt-to-income ratio, 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.

When a creditor makes their 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
• The loan payment amount
• Any simultaneous loans secured by the same property
• Ongoing expenses related to the property
• Additional debt
• Debt-to-income ratio
• Credit history

The lender can consider additional conditions if they choose.

The ATR/QM Rule applies to almost every loan made to consumers secured by a dwelling, or residence. However, exemptions do exist, and transactions that fall outside that definition aren’t covered under the ATR/QM Rule. You may encounter some in the business of real estate as a customer. 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 ATR/QM Rule takes measures to protect borrowers by holding lenders to higher standards than in the past. 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, though, so the future for many borrowers is subject to more potential changes. Therefore, it’s always a good idea for any aspiring homeowner to stay informed.

When you apply for a mortgage, your lender will examine your finances to see if you qualify and can repay the mortgage loan you’re seeking. That way, you’re at far less risk of being unable to make your monthly mortgage payments. 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®.