The ATR/QM Rule: What It Is And What Borrowers Should Know
Ashley Kilroy6-minute read
November 24, 2022
While starting your journey to homeownership may be exciting, it comes with an array of challenges. The first hurdle is qualifying for your future mortgage. Getting approved is one thing, but many Americans struggle to afford the regular payment. According to the Consumer Financial Protection Bureau (CFPB), as of May 2021, more borrowers are behind on their mortgage now than during the Great Recession.
The Bureau recently published the final rules revising the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM), which the CFPB designed to make mortgages accessible while keeping lenders accountable. This information can be complex, so read on to learn more about how the ATR/QM rule supports consumers like you.
The CFPB Ability To Repay/Qualified Mortgage Rule: What Does It Mean?
In 2010, Congress signed into law a large piece of legislation called the Dodd-Frank Wall Street Reformed Consumer Protection Act, sometimes shortened to the Dodd-Frank Act. The Act amended the 1968 Truth in Lending Act (TILA), otherwise commonly referred to as Regulation Z. Overall, the Dodd-Frank Act reformed the financial system and added new government agencies to carry that out. The Act created these regulations in an effort to help the country avoid another financial crisis like in 2008.
Multiple provisions from the Act took effect over the course of several years. In particular, the ATR/QM rule, which effectively makes it harder for lenders to offer loans that are not in the best interest of the applicant. It requires institutions, individuals, or groups to make a “reasonable and good faith determination” regarding a consumer’s ability to repay a loan according to its terms. This must be done before the lender creates a residential mortgage.
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.
However, some provisions and features, like the 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 includes multiple categories of qualified mortgages. One type of QMs under the temporary category called the “GSE Patch” is expired on July 1st, 2021. This expiration may limit or create problems for the availability of mortgage credit. The Consumer Financial Protection Bureau (CFPB) published amendments that revised the ATR Rule to preempt these possible issues.
The foremost of the two most recent and final rules is the Amended General QM Rule. It eliminated the GSE QM category of QMs. On top of that, the amendment rolled out changes to ATR/QM rule’s General QMs. Among the various rules, DTI Limitation and the Appendix Q Requirement experienced the most significant changes.
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 forces the creditor to consider the borrower’s present and reliable future income, outside 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 is vital for GSEs like Fannie Mae and Freddie Mac, too. The enterprises are not going anywhere anytime soon, outliving the GSE patch. Instead, the APR cap ensures that the two have a permanent solution to ensure ATR rule compliance.
Appendix Q also saw a removal. Originally, the appendix set the standards for considering a consumer’s monthly debts and income. But many argued Appendix Q was too strict and complicated. The APR limit allows lenders to use CFPB-specified income standards that GSEs and the Federal Housing Administration (FHA) also use.
Seasoned QM Rule
The second amended rule is the Seasoned QM Rule. The lack of a market for non-QM lending is a driving factor for its adoption. Essentially, it adds another QM category called Seasoned QMs with the goal to ensure access to affordable mortgage credit. It also encourages safe lending for loans that are higher priced or that fall outside of QMs.
So, the Seasoned QM Rule protects non-QMs and Higher-Priced QMs from liability as long as they meet ATR Rule requirements. Under the Seasoned QM Rule, these two types of mortgages, after creation, may be eligible for safe harbor protection. Therefore, as long as the loans adhere to specific regulations under the ATR/QM rule, they are protected from liability.
Some of the rules for defining a Seasoned QM as a loan include: that it’s secured by a first lien, is not a high-cost mortgage, has a fixed interest rate, and that the original creditor or purchaser held the portfolio for at least 36 months. The CFPB chose 36 months based on the reasoning that the earlier the delinquency, the more likely the consumer could not pay the loan from the start. That is in contrast to the concept of defaulting as a result of a change in circumstance.
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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, a balloon or interest-only payments, or 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 is vital for the lender to find the consumer financially stable. Some of the personal details the lender may look at to decide this are 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 either of the first two, 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 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, and credit history. The lender can consider additional conditions if they choose.
The ATR/QM rule operates under the legal presumption that creditors originating the QMs complied with ATR rule requirements. So, it’s assumed the lender’s loan matches the law. Adhering to the rule and pricing limits provides the lender with a safe harbor, otherwise referred to as a conclusive presumption.
A safe harbor acts as legal protection for them in the case a borrower sues. In particular, it gives them some coverage if the consumer accuses them of failing to make an appropriate good faith determination.
While that does give the lender something to fall back on, it also provides protection for the borrower. Non-QM and high-cost QM loans don’t receive this protection. Instead, these QMs priced over a certain threshold come with a rebuttable presumption of compliance. That gives borrowers a stronger case that the lender did not follow ATR standards before creating the loan.
What Doesn’t Fall Under The ATR/QM Rule?
The ATR/QM rule applies to almost every loan made to consumers secured by a dwelling, or residence. Therefore, there are exemptions. Transactions that fall outside that definition are not 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,
- and consumer credit transactions secured by vacant land.
The rule also creates an exemption for refinanced 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 by or offered through particular creditors or loan programs may be exempt under certain conditions.
The Bottom Line
The ATR/QM rule takes measures to protect borrowers by holding lenders to higher standards than in the past. Moreover, the new rules do so without compromising consumers’ access to credit. It encourages appropriate, safe lending and innovation. The legislation saw several revisions and amendments since Congress signed the Dodd-Frank Act into law, though. Like this, the future for many borrowers may be subject to law changes in the future.
So, it’s always important for any potential homeowner to stay informed. Learn more about the process of qualifying for a mortgage and ways to increase your chances of getting approved to streamline your next purchase.
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