Ability-to-Repay and Qualified Mortgage Rule

JANUARY 8, 2014

SMALL ENTITY COMPLIANCE GUIDE

Ability-to-Repay and

Qualified Mortgage

Rule

Version Log

The Bureau updates this guide on a periodic basis to reflect rule changes and administrative

updates which impact guide content. Below is a version log noting the history of this document

and its updates:

Date

Version

Rule Changes

January 8, 2014

2.2

Miscellaneous Administrative Changes

October 17,

2013

2.1

Points-and-Fees Calculation: Loan Originator Compensation. Clarifies for

retailers of manufactured homes and their employees what

compensation must be counted as loan originator compensation and

thus included in the points and fees thresholds for qualified

mortgages and high-cost mortgages. (See “What are the QM points-and-

fees caps and what do I include when calculating points and fees?’ on page

37.)

 Points and Fees Calculation: Non-consumer payments. Clarifies the

treatment of payments made by the creditor or a seller or

other third party, rather than by the consumer, for purposes

of what must be included in the points and fees thresholds

for qualified mortgages and high-cost mortgages. (See “What

are the QM points-and-fees caps and what do I include when

calculating points and fees? on page 37.)

Period to be considered when making Small Creditor status determination after

January 10, 2016. Changes the look back period for rural and

underserved lending activity that is used in the definition of Small

Creditor, effective January 10, 2016. (See “What types of QMs can small

creditors originate?" Type 2: Balloon-Payment QM on page 35.)

August 14, 2013

2.0

Exemptions: Creditors with certain designations, loans pursuant to

certain programs, certain nonprofit creditors, and mortgage loans

made in connection with certain Federal emergency economic

stabilization programs are exempt from ability to repay requirements.

(See “Which types of creditors and loan programs are exempt from the ability-to-

repay requirements? (§ 1026.43(a)(3)(iv) to (vi))” on page

26.)

Qualified Mortgages (QMs): Additional definition of a qualified

mortgage for loans held in portfolio by small creditors. (See “What

types of QMs can small creditors originate?” on page 33.)

Qualified Mortgages: Transitional definition of creditors eligible to

originate Balloon-Payment Qualified Mortgages. (See “What types of

QMs can small creditors originate?” on page 33.)

Qualified Mortgages: Shifts the annual percentage rate (APR) threshold

for Small Creditor and Balloon-Payment QMs from 1.5 percentage

points above the average prime offer rate (APOR) on first-lien loans

to 3.5 percentage points above APOR. (See “What makes a QM loan

higher-priced” on page 30.)

Points-and-Fees Calculation: Modifies the requirements regarding the

inclusion of loan originator compensation in the points-and-fees

calculation. (See “What are the QM points-and-fees caps and what do I

include when calculating points and fees? (§§ 1026.32(b)(1) and

1026.43(e)(3))” on page 37.)

Qualified Mortgages: Clarifies how eligibility will be determined for

QMs under the temporary provision allowing QM status for loans

eligible for purchase, guaranty, or insurance by the GSEs or certain

federal agencies. (See “What types of QMs can all creditors originate? Type 2

on page 32.)

Qualified Mortgages: Amends and clarifies how debt and income will be

determined under appendix Q for the purpose of meeting the 43%

DTI requirement under the general QM provision. (See “What types of

QMs can all creditors originate? Type 1 on page 31.)

April 30, 2013

1.0

Original Document

Table of Contents

Version Log ...................................................................................................... 2

Introduction ............................................................................................... 7 1.

I. What is the purpose of this guide? ........................................................... 9

II. Who should read this guide? ................................................................. 10

III. Who can I contact about this guide or the ATR/QM rule? ........................ 10

Overview of the Ability-to-Repay/Qualified Mortgage Rule ....................... 11 2.

What is the ATR/QM rule about? ......................................................... 11

II. When do I have to start following this rule? ............................................ 12

III. What transactions are covered by the ATR/QM rule? (§ 1026.43(a)) ........... 12

IV. How long do I have to keep records on compliance with the ATR/QM rule?

(§ 1026.25(c)(3)) ....................................................................... 13

About Ability to Repay ............................................................................. 14 3.

I. What is the general ATR standard? (Comment 1026.43(c)(1)-2) .................. 14

II. What are the eight ATR underwriting factors I must consider and verify under

the rule? (Comment 1026.43(c)(2)-4) ........................................... 14

III. How do I verify information I considered using reliable third-party records?

(Comment 1026.43(c)(3)-4) ........................................................ 15

IV. What is a reasonably reliable third-party record? (§ 1026.43(c)(3)) ............... 16

V. How do I determine ATR? (§ 1026.43(c)(1)) ............................................ 17

VI. Do loans originated under the general ATR standard have to comply with a

debt-to-income (DTI) threshold? (§ 1026.43(c)(2)(vii)) ................... 19

VII. What do I include on the income side of the debt-to-income ratio when

determining ATR? .................................................................... 19

VIII. How do I calculate, consider, and confirm income, assets,

employment, and credit history? ................................................. 19

IX. What do I include on the debt side of the debt-to-income ratio when

determining ATR? .................................................................... 21

X. How do I calculate, consider, and confirm debt information? .................... 22

XI. Does the ATR rule ban certain loan features or transaction types? (§

1026.43(c)(2) and (5)) ................................................................ 25

XII. What happens if a consumer has trouble repaying a loan I originate under the

general ATR rule? What happens if my organization violates the

regulation? ............................................................................... 25

XIII. Which types of creditors and loan programs are exempt from the

ability-to-repay requirements? (§ 1026.43(a)(3)(iv) to (vi)) ............... 26

About Qualified Mortgages ...................................................................... 28 4.

What is a Qualified Mortgage? (§ 1026.43(e) and (f)) ................................. 28

II. What is the difference between safe harbor and rebuttable presumption in

terms of liability protection? (§ 1026.43(e)(1)) ............................... 29

III. What makes a QM loan higher-priced? (§ 1026.43(b)(4)) ........................... 30

IV. Are there different types of QMs? .......................................................... 31

V. What types of QMs can all creditors originate? ........................................ 31

VI. What types of QMs can small creditors originate? .................................... 33

VII. Are there special requirements for calculating the DTI ratio on QM loans? (§

1026.43(e)(2)(vi) and appendix Q) ............................................... 36

VIII. What are the QM points-and-fees caps and what do I include when

calculating points and fees? (§§ 1026.32(b)(1) and 1026.43(e)(3)) ...... 37

IX. Can I charge prepayment fees on a covered transaction? (§ 1026.43(g)) ....... 42

Refinancing from Non-Standard to Standard Loans: ATR Special 5.

Circumstance (§ 1026.43(d)) ..................................................................... 44

I. Do the standard ATR requirements apply when I refinance consumers from a

non-standard to a standard loan? (§ 1026.43(d)(1)(ii)(A)) ................ 44

II. How do I calculate non-standard and standard payment amounts to determine

whether the consumer’s monthly payment on the standard mortgage

will represent a material decrease? (§ 1026.43(d)(5)) ....................... 46

Practical Implementation and Compliance Considerations ........................ 47 6.

Other Resources ....................................................................................... 50 7.

I. Where can I find a copy of the ATR/QM rule and get more information about

it? ........................................................................................... 50

Introduction 1.

During the years preceding the mortgage crisis, too many mortgages were made to consumers

without regard to the consumers’ ability to repay the loans. Loose underwriting practices by

some creditors – including failure to verify consumers’ income or debts and qualifying

consumers for mortgages based on “teaser” interest rates after which monthly payments would

jump to unaffordable levels – contributed to a mortgage crisis that led to the nation’s most

serious recession since the Great Depression.

In response to this crisis, in 2008 the Board of Governors of the Federal Reserve System

adopted a rule under the Truth in Lending Act prohibiting creditors from making higher-priced

mortgage loans without assessing consumers’ ability to repay the loans. Creditors have had to

follow these requirements since October 2009.

In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank

Act), Congress adopted similar (but not identical) Ability-to-Repay (ATR) requirements for

virtually all closed-end residential mortgage loans. Congress also established a presumption of

compliance with the ATR requirements for a certain category of mortgages, called Qualified

Mortgages (QMs).

In January 2013, the Consumer Financial Protection Bureau adopted a rule that implements the

ATR/QM provisions of the Dodd-Frank Act. In May, July, and October 2013, the Bureau issued

rules amending certain provisions of the January 2013 rule. The ATR/QM rule is the subject of

this guide.

This rule generally applies to closed-end consumer credit transactions that are secured by a

dwelling for which you receive an application on or after January 10, 2014.

As you will see in reading this guide, the ATR rule describes the minimum standards you must

use to determine that consumers have the ability to repay the mortgages they are extended.

While the ATR rule provides eight specific factors you must consider (including verifications of

income or assets relied on, employment if relied on, and review of credit history), the rule does

not dictate that you follow particular underwriting models.

The rule also contains special requirements for creditors that are refinancing their own customers

into more affordable loans to help those customers avoid payment shock.

In addition to the general ATR requirements, the rule also defines the requirements for Qualified

Mortgages and how QM status works if there is a question about whether a creditor has assessed

the borrower’s ATR.

The rule provides a safe harbor for QMs that are not higher-priced. Loans that are higher-priced

and meet the definition of a Qualified Mortgage have a different protection, that of a rebuttable

presumption that the creditor complied with the ATR requirements.

This guide explains the requirements for creditors to follow to determine whether the loans your

organization originates meet the QM requirements and, if so, whether they will receive either a

safe harbor or rebuttable presumption of compliance with the ATR requirements.

It also discusses the grounds for rebutting the presumption for higher-priced QMs – principally,

that the consumer’s income, debt obligations, and payments on the loan and any simultaneous

loans – did not leave the consumer with sufficient residual income/assets left to live on.

Qualified Mortgages have three types of requirements: restrictions on loan features, points and

fees, and underwriting. One of the underwriting requirements under the general definition for

Qualified Mortgages is that the borrower’s total debt-to-income ratio is not higher than 43

percent.

For a temporary, transitional period, certain loans that are eligible for sale or guarantee by a

government-sponsored enterprise (GSE) – the Federal National Mortgage Association (Fannie

Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) – or are eligible under

specified federal agencies’ guarantee or insurance programs will be considered Qualified

Mortgages under a temporary definition. The loans must meet certain QM restrictions on loan

features and points and fees, but they are not subject to a flat 43 percent DTI limit.

In response to the special concerns of small creditors and to preserve access to nonconforming

mortgages and mortgages in rural and underserved areas, there are also special provisions for

Qualified Mortgages held in portfolio by small creditors, including some types of

balloon-payment mortgages. These Qualified Mortgages have a different, higher threshold for

when they are considered higher-priced for Qualified Mortgage purposes than other Qualified

Mortgages. They also are not subject to the 43 percent DTI limit.

Finally, the rule bans most prepayment penalties, except on certain non-higher-priced Qualified

Mortgages with either fixed or step rates. Prepayment penalties are allowed on these non-higher-

priced loans only if the penalties satisfy certain restrictions and are permitted under law and if the

creditor has offered the consumer an alternative loan without such penalties.

I. What is the purpose of this

guide?

The purpose of this guide is to provide an easy-to-use summary of the ATR/QM rule. This

guide also highlights issues that small creditors, and those that work with them, might find

helpful to consider when implementing the rule.

This guide also meets the requirements of Section 212 of the Small Business Regulatory

Enforcement Fairness Act of 1996, which requires the Bureau to issue a small-entity compliance

guide to help small businesses comply with these new regulations.

Although underwriting standards and verification practices have tightened considerably since the

financial crisis, creditors may want to review their processes, underwriting guidelines, software,

contracts, or other aspects of their business operations in order to identify any changes needed

to comply with this rule.

Changes related to this rule may take careful planning, time, or resources to implement. This

guide will help you identify and plan for any necessary changes.

To support rule implementation and ensure the industry is ready for the new consumer

protections, the Bureau will coordinate with other agencies, publish plain-language guides,

publish updates to the Official Interpretations, and publish readiness guides.

The guide summarizes the ATR/QM rule, but it is not a substitute for the rule. Only the rule and

its Official Interpretations (also known as Commentary) can provide complete and definitive

information regarding its requirements. The discussions below provide citations to the sections

of the rule on the subject being discussed. Keep in mind that the Official Interpretations, which

provide detailed explanations of many of the rule’s requirements, are found after the text of the

rule and its appendices. The interpretations are arranged by rule section and paragraph for ease

of use. The complete rule, as issued on January 10, 2013 and the Official Interpretations are

available at

http://www.consumerfinance.gov/regulations/Ability-To-Repay-and-qualified-

mortgage-standards-under-the-truth-in-lending-act-regulation-z/. Additionally, CFPB issued

three final rules to amend and clarify provisions in the January 2013 Final Rule: the June 2013

ATR/QM Concurrent Final Rule, July 2013 Final Rule, and the October 2013 Final Rule.

The focus of this guide is the ATR/QM rule. This guide does not discuss other federal or state

laws that may apply to the origination of closed-end credit.

At the end of this guide, there is more information about the rule and related implementation

support from the Bureau.

II. Who should read this guide?

If your organization originates closed-end residential mortgage loans, you may find this guide

helpful. This guide will help you determine your compliance obligations for the mortgage loans

you originate.

This guide may also be helpful to secondary market participants, software providers, and other

companies that serve as business partners to creditors.

III. Who can I contact about this

guide or the ATR/QM rule?

If, after reviewing this guide and the regulation(s) and commentary it addresses, you have a

question regarding regulatory interpretation, please email CFPB_reginqui[email protected] with

your specific question, including reference to the applicable regulation section(s). If you do not

have access to the internet, you may leave this information in a voicemail at 202-435-7700.

Email comments about the guide to CFPB_MortgageRulesImple[email protected]v

Your

feedback is crucial to making this guide as helpful as possible. The Bureau welcomes your

suggestions for improvements and your thoughts on its usefulness and readability.

The Bureau is particularly interested in feedback relating to:

 How useful you found this guide for understanding the rule

 How useful you found this guide for implementing the rule at your business

 Suggestions you have for improving the guide, such as additional implementation tips

Overview of the 2.

Ability-to-

Repay/Qualified

Mortgage Rule

I. What is the ATR/QM rule about?

The ATR/QM rule requires that you make a reasonable, good-faith determination before or

when you consummate a mortgage loan that the consumer has a reasonable ability to repay the

loan, considering such factors as the consumer’s income or assets and employment status (if

relied on) against:

 The mortgage loan payment

 Ongoing expenses related to the mortgage loan or the property that secures it, such as

property taxes and insurance you require the consumer to buy

 Payments on simultaneous loans that are secured by the same property

 Other debt obligations, alimony, and child-support payments

The rule also requires you to consider and verify the consumer’s credit history.

As discussed in more detail below, the rule provides a presumption that you have complied with

the ATR rule if you originate QMs.

QMs generally cannot contain certain risky features (such as allowing interest-only payments or

negative amortization). In addition, points and fees on QMs are limited. For a loan to be a QM,

it also must meet certain underwriting criteria.

In exchange for meeting these requirements, QMs receive either a conclusive or a rebuttable

presumption that you, the creditor, complied with the ATR requirements. The type of

presumption depends on the pricing of the loan - whether the loan is not higher-priced or is

higher-priced.

The ATR/QM rule also implements other provisions of the Dodd-Frank Act that:

 Limit prepayment penalties

 Require that you retain records for three years after consummation showing you

complied with ATR and other provisions of this rule

II. When do I have to start following

this rule?

This rule applies to transactions covered under the rule for which you receive an application on

or after January 10, 2014.

III. What transactions are covered by

the ATR/QM rule? (§ 1026.43(a))

The Bureau’s ATR/QM rule applies to almost all closed-end consumer credit transactions

secured by a dwelling including any real property attached to the dwelling. This means loans

made to consumers and secured by residential structures that contain one to four units, including

condominiums and co-ops. Unlike some other mortgage rules, the ATR/QM rule is not limited

to first liens or to loans on primary residences.

However, some specific categories of loans are

excluded from the rule. Specifically, the rule does not

apply to:

 Open-end credit plans (home equity lines of

credit, or HELOCs)

 Time-share plans

 Reverse mortgages

 Temporary or bridge loans with terms of 12

months or less (with possible renewal)

Implementation Tip:

The Truth

in Lending Act applies to a loan

modification only if it is considered a

refinancing under Regulation Z. If a

loan modification is not subject to the

Truth in Lending Act, it is not subject

to the ATR/QM rule. Therefore, you

should determine if a loan

modification is a refinancing to see if

the ATR/QM rule applies. You will

find the rules for determining

whether a loan workout is a

modification or a refinance in

Regulation Z at § 1026.20(a) and

accompanying Commentary.

 A construction phase of 12 months or less (with possible renewal) of a construction-to-

permanent loan

 Consumer credit transactions secured by vacant land

In addition, certain types of creditors or loan programs may be exempt from the ATR

requirements. (See “Which types of creditors and loan programs are exempt from the ability-to-repay

requirements?” on page 26.)

IV. How long do I have to keep

records on compliance with the

ATR/QM rule? (§ 1026.25(c)(3))

The rule requires that you retain evidence that you complied with the ATR/QM rule, including

the prepayment penalty limitations, for three years after consummation, though you may want to

keep records longer for business purposes.

About Ability to 3.

Repay

I. What is the general ATR

standard? (Comment

1026.43(c)(1)-2)

Under the general ATR standard, you must make a reasonable, good-faith determination before

or when you consummate a covered mortgage loan that the consumer has a reasonable ability to

repay the loan.

II. What are the eight ATR

underwriting factors I must

consider and verify under the

rule? (Comment 1026.43(c)(2)-4)

A reasonable, good-faith ATR evaluation must include eight ATR underwriting factors:

Current or reasonably expected income or assets (other than the value of the 1.

property that secures the loan) that the consumer will rely on to repay the loan

Current employment status (if you rely on employment income when assessing the 2.

consumer’s ability to repay)

Monthly mortgage payment for this loan. You calculate this using the introductory 3.

or fully-indexed rate, whichever is higher, and monthly, fully-amortizing payments

that are substantially equal (See “What do I include on the debt side of the debt-to-income ratio

when determining ATR?” on page 21 for special rules for calculating payments for interest-only,

negative-amortization, and balloon loans.)

Monthly payment on any simultaneous 4.

loans secured by the same property

Monthly payments for property 5.

taxes and insurance that you

require the consumer to buy, and

certain other costs related to the

property such as homeowners

association fees or ground rent

Debts, alimony, and child-6.

support obligations

Monthly debt-to-income ratio or 7.

residual income, that you

calculated using the total of all of

the mortgage and non-mortgage

obligations listed above, as a ratio

of gross monthly income

Credit history 8.

The rule does not preclude you from considering additional factors, but you must consider at

least these eight factors.

III. How do I verify information I

considered using reliable third-

party records? (Comment

1026.43(c)(3)-4)

Your organization must verify the information you rely on using reasonably reliable third-party

records. For example, you generally cannot rely on what consumers orally tell you about their

income. You must verify a consumer’s income using documents such as W-2s or payroll

statements.

While you must follow the reasonably reliable third-party standard, the rule provides for a wide

variety of sources that may help you to verify the information you rely on to determine ATR.

There are a wide variety of documents and sources of information your organization can use as

you determine ATR, and you have significant flexibility in how you verify each of the eight

factors. For example:

Implementation Tip: You may

already have underwriting policies,

procedures, and internal controls that

consider these factors. How

ever, you

should check your policies and

procedures to en

sure that they reflect

that you will consider each of the

eight factors. It may also be helpful

to document how you consider the

factors. However, the rule does not

require validation of underwriting

criteria using mathematical models.

 In addition to a W-2 or payroll statement, you may verify income using tax returns, bank

statements, receipts from check-cashing or funds-transfer services, benefits-program

documentation, or records from an employer. Copies of tax-return transcripts or payroll

statements can be obtained directly from the consumer or from a service provider, and

need not be obtained directly from a government agency or employer, as long as the

records are reasonably reliable and specific to the individual consumer.

 If a consumer has more income than, in your

reasonable and good-faith judgment, is needed to

repay the loan, you do not have to verify the extra

income. For example, if a consumer has both a full-

time and a part-time job and you reasonably

determine that income from the full-time job is

enough for the consumer to be able to repay the

loan, you do not have to verify income from the

part-time job.

 You can document a consumer’s employment status

by calling the employer and getting oral verification,

as long as you maintain a record of the information

you received on the call.

 You can use a credit report to verify a consumer’s

debt obligations; you do not need to obtain

individual statements for every debt.

 If a consumer does not have a credit history from a

credit bureau, you can choose to verify credit

history using documents that show nontraditional

credit references, such as rental payment history or

utility payments.

IV. What is a

reasonably reliable third-party

record? (§ 1026.43(c)(3))

Here is a list of some of the types of reasonably reliable third-party records your organization

may choose to use. Note, however, that this list is not all-inclusive:

 Records from government organizations such as a tax authority or local government

Implementation Tip: If your

organization does not currently

verify any of the ATR underwriting

factors, plan to create new

verification, quality-control, and

compliance processes and to make

any related system adjustments.

Implementation Tip: While

you do not have to retain actual

paper copies of documentation

used in underwriting a transaction,

you must be able to reproduce

such records accurately. For

example, if you use a consumer’s

W-2 tax form to verify income,

you must be able to reproduce the

form itself, not merely the income

information that was contained in

the form. Accordingly, you can

obtain records transmitted

electronically, such as via email or

a secure external Internet link to

access information, if you can

retain or otherwise reproduce such

records accurately during the three

years you must retain ATR

records. (Comment 43(b)(13)-1)

 Federal, state, or local government agency letters detailing the consumer’s income,

benefits, or entitlements

 Statements provided by a cooperative, condominium, or homeowners association

 A ground rent or lease agreement

 Credit reports

 Statements for student loans, auto loans, credit

cards, or existing mortgages

 Court orders for alimony or child support

 Copies of the consumer’s federal or state tax

returns

 W-2 forms or other IRS forms for reporting

wages or tax withholding

 Payroll statements

 Military leave and earnings statements

 Financial institution records, such as bank account statements or investment account

statements reflecting the value of particular assets

 Records from the consumer’s employer or a third party that obtained consumer-specific

income information from the employer

 Check-cashing receipts

 Remittance-transfer receipts

V. How do I determine ATR?

(§ 1026.43(c)(1))

Your organization is responsible for developing and applying its own underwriting standards and

making changes to those standards over time in response to empirical information and changing

economic and other conditions.

Implementation Tip: When

determining ATR, you have to verify

only the income or assets used to

qualify the consumer for the loan.

Implementation Tip

: When the

consumers’ applications list debt that

does not show up on their credit

reports, you must consider that debt

in assessing either the consumers’

debt-to-income ratios or residual

income, but you do not need to

independently verify that debt.

To help your organization incorporate the ATR concepts into its operations, the Bureau has

prepared some examples that illustrate how your internal policies can influence your ATR

determinations.

The list below is not a comprehensive list of all the ways your underwriting guidelines might

measure ATR.

Each of you must look at the issue of ATR in the context of the facts and circumstances relevant

to your market, your organization, and your individual consumers.

Given those caveats, here are some of the types of factors that may show that your ATR

determination was reasonable and in good faith:

 Underwriting standards: You used standards to underwrite the transaction that have

historically resulted in comparatively low rates of delinquency and default during adverse

economic conditions.

 Payment history: The consumer paid on time for a significant time after origination or

reset of an adjustable-rate mortgage.

Among the types of factors that may show that your ATR determination was not reasonable and

in good faith:

 Underwriting standards: You ignored evidence that your underwriting standards are not

effective at determining consumers’ repayment ability.

 Inconsistency: You applied underwriting standards inconsistently or used underwriting

standards different from those you used for similar loans without having a reasonable

justification.

 Payment history: The consumer defaults early in the loan, or shortly after the loan resets,

without having experienced a significant financial challenge or life-altering event.

The reasonableness and good faith of your determination of ATR depends on the facts and

circumstances relevant to the particular loan. For example, a particular ATR determination may

be reasonable and in good faith even though the consumer defaulted shortly after consummation

if, for example, the consumer experienced a sudden and unexpected loss of income.

If the records you review indicate there will be a change in the consumers’ repayment ability after

consummation (for example, they plan to retire and not obtain new employment, or they plan to

transition from full-time to part-time work) you must consider that information. (Comment

43(c)(1)-2) However, you may not make inquiries or verifications prohibited by Regulation B.

(Comment 43(c)(1)-3)

VI. Do loans originated under the

general ATR standard have to

comply with a debt-to-income

(DTI) threshold?

(§ 1026.43(c)(2)(vii))

The general ATR standard requires creditors to consider DTI or residual income, but does not

contain specific DTI or residual income thresholds.

VII. What do I include on the income

side of the debt-to-income ratio

when determining ATR?

You can include earned income (wages or salary); unearned income (interest and dividends); and

other regular payments to the consumer such as alimony, child support, or government benefits.

In all cases, the amounts you rely upon to determine ATR must be verified.

Once you have information about the consumers’ income, you will use it, along with the

consumers’ debt information, to calculate the DTI ratio or residual income.

VIII. How do I calculate, consider, and

confirm income, assets,

employment, and credit history?

When you are evaluating the consumer’s employment history, credit history, and income or

assets to determine ATR, you must verify only what is relied on to determine ATR.

If a consumer has a full-time job and a part-time job and uses only the income from the full-time

job to pay the loan, you do not need to verify the income from the part-time job. If two or more

consumers apply for a mortgage, you do not have to consider both incomes – unless both

incomes are required to qualify for the loan and demonstrate ATR.

The same principles apply to a consumer’s assets, too.

Income does not have to be full-time or salaried for you to consider it in your ATR

determination. You can consider seasonal or bonus income. Remember that income relied on

has to be verified using reasonably reliable third-party records.

For example, you could verify a Christmas tree farmer’s seasonal income via tax returns showing

that the farmer earned $50,000 a year during the past three Decembers and nothing else the rest

of the year, and divide that $50,000 evenly across 12 months.

Future income can count toward ATR if you verify it using reasonably reliable third-party

records. Suppose you have a consumer who accepts a job in March, but will not start until he

graduates from school in May. If the employer will confirm the job offer and salary in writing,

you can consider the future expected income in your ATR determination.

i. Consumer-supplied income documents

(§ 1026.43(b)(13))

Sometimes you may have to rely on the consumers’ report of their own income. For example, a

cattle rancher might give you an updated profit-and-loss statement for the current year to

supplement his tax returns from prior years. These records are reasonably reliable third-party

records to the extent that an appropriate third party has reviewed them. For example, if a third-

party accountant prepared or reviewed the cattle rancher’s profit-and-loss statement, then you

can use the statement to verify the rancher’s current income.

ii. Types of employment information

(§ 1026.43(c)(3))

You can consider and verify many types of employment to use in making your ATR

determination, including:

 Full-time

 Part-time

 Seasonal

 Irregular

 Military

 Self-employment

Consider the characteristics of the consumer’s type of employment. A wheat farmer has a

different income stream than a store clerk.

You can verify the consumer’s employment by calling the employer and obtaining oral

verification, so long as you make a written record memorializing the verification.

iii. Sources of credit history information

(§ 1026.43(c)(3)(iii))

A credit report generally is considered a reasonably reliable third-party record for verification

purposes.

While the rule requires that you examine credit history, it does not prescribe a particular type of

credit history to consider or prescribe specifically how you should judge the information you

receive. Your consideration of credit history must be reasonable in light of the facts and

circumstances.

 Credit history might include information about:

 Number and age of credit lines

 Payment history

 Judgments

 Collections

 Bankruptcies

 Nontraditional credit references such as rental payment history or utility payments

If you know, or have a reason to know, that the information on a consumer’s credit report is

inaccurate, you can ignore it. For example, there might be a fraud alert or a dispute on the credit

report, or the consumer may present other evidence that contradicts the credit report. In those

cases, you may choose to disregard the inaccurate or disputed items.

If the consumer lists a debt obligation that does not show up on the credit report, you may

accept the consumer’s statement about the existence and amount of the obligation without

further verification.

IX. What do I include on the debt

side of the debt-to-income ratio

when determining ATR?

In assessing a consumer’s ATR, four underwriting factors help you evaluate the consumer’s

debts. You will need to find out the consumer’s total monthly payments for:

The loan you are underwriting 1.

Any simultaneous loans secured by the same property 2.

Mortgage-related obligations – property taxes; insurance required by the creditor; 3.

fees owed to a condominium, cooperative, or homeowners association; ground rent

or leasehold payments; and special assessments

Current debt obligations, alimony, and child support 4.

Once you have the total debt figure, you will use it, along with the consumer’s total monthly

income, to calculate the monthly debt-to-income ratio or residual income.

Include ongoing, required monthly, quarterly, or annual debts of the consumer.

Do not include debts paid off at or before consummation.

X. How do I calculate, consider, and

confirm debt information?

i. Calculating payments under the ATR standard for

the loan you are underwriting: (§ 1026.43(c)(5))

General rule: If the interest rate on the loan can vary during the term of the loan, as with an

adjustable-rate or step-rate mortgage, when you calculate the monthly payment the consumer will

have to make for the new loan, you will usually use the greater of the fully-indexed rate or the

introductory rate.

You must base your calculations on substantially equal monthly payments that would fully

amortize the loan.

Special rules: However, there are also special rules and guidance provided for certain types of

loans:

 For balloon loans, the calculation depends on whether the loan is a higher-priced loan.

Higher-priced loans are generally defined as having an annual percentage rate (APR)

that, as of the date the interest rate is set, exceeds the Average Prime Offer Rate

(APOR) by 1.5 percentage points or more for first-lien loans and 3.5 percentage points

or more for subordinate-lien loans. APOR is published weekly at

https://www.ffiec.gov/ratespread

 For non-higher-priced balloon loans: Use the maximum payment scheduled during the

first five years after the first regular periodic payment comes due.

 For higher-priced balloon loans: Use the maximum payment in the payment schedule,

including any balloon payment.

 For interest-only loans: Use the greater of the fully-indexed or introductory rate and

equal, monthly payments of principal and interest that will repay the outstanding loan

amount on the date the loan recasts over the remaining term of the loan.

 For negative-amortization loans: Calculate the maximum loan amount, which will

include the potential added principal assuming the consumer makes the minimum

required payments until the date the loan recasts. Use the greater of the fully-indexed or

introductory rate and equal, monthly payments of principal and interest that will repay

that maximum loan amount on the date the loan recasts over the remaining term of the

loan.

To be substantially equal, no two monthly payments should vary by more than 1 percent. For

loans paid quarterly or annually, convert the payments into monthly payments when you

determine ATR.

ii. Calculating payments for simultaneous loans

secured by the same property: (§ 1026.43(c)(6))

A simultaneous transaction, such as a piggy-back or silent second, can influence a consumer’s

ATR. A transaction that recently closed or will close around the same time as the mortgage you

are originating may not show up on the consumer’s credit report.

But if you know, or have reason to know, that there is going to be a simultaneous transaction

around the time your transaction consummates, you need to consider the monthly payment on

that transaction in accordance with the following requirements.

 For simultaneous transactions that are not HELOCs - Your ATR assessment should

include a monthly payment on the simultaneous loan that is calculated using the

appropriate calculation method for adjustable-rate mortgages, interest-only loans, or

other categories discussed above, depending on what type of simultaneous loan is made.

 For simultaneous transactions that are HELOCs - Your ATR assessment should include

a monthly payment on the simultaneous loan that is calculated based on the amount of

credit to be drawn down at or before consummation of the main loan.

iii. Mortgage-related obligations: (§ 1026.43(c)(3)

and comment 43(c)(3)-5)

You can get records for the consumer’s mortgage-related obligations from many sources

including:

 Property taxes: government entities or the amount listed on the title report (if the source

of the information was a local taxing authority)

 Cooperative, condominium, or homeowners associations: a billing statement from the

association

 Levies and assessments: statement from the assessing entity (for example, a water district

bill)

 Ground rent: the current ground rent agreement

 Lease payments: the existing lease agreement

 Other records: can be reasonably reliable if they come from a third party

iv. Other recurring debts: (§ 1026.43(c)(3) and

comment 43(c)(3)-6)

The rule requires you to consider a consumer’s current debt obligations and any alimony or child

support the consumer is required to pay.

Typical recurrent monthly debts include:

 Student loans

 Auto loans

 Revolving debt

 Existing mortgages not being paid off at or before consummation

You can generally verify such obligations based on the consumer’s credit report or based on

other items reported on the consumer’s application. Creditors have significant flexibility to

consider current debt obligations in light of facts and circumstances, including that an obligation

is likely to be paid off soon after consummation. Similarly, creditors should consider whether

debt obligations in forbearance or deferral at the time of underwriting are likely to affect the

consumer’s ability to pay after the expiration of the forbearance or deferral period. (See discussion

on page 21 regarding when it is appropriate to disregard information in a credit report because it is disputed or

inaccurate.)

When two or more customers apply as joint obligors with primary liability on a loan, consider

the debt obligations and credit histories of both of them in assessing their ability to repay the

loan. But you do not have to include in your ATR consideration the debt obligations or credit

history of someone who is merely a guarantor or surety on the loan. (Comment 43(c)(2)(vi)-2)

XI. Does the ATR rule ban certain

loan features or transaction

types? (§ 1026.43(c)(2) and (5))

The ATR rule does not ban any particular loan features or transaction types, but a particular loan

to a particular consumer is not permissible if the creditor does not make a reasonable, good-faith

determination that the consumer has the ability to repay. Thus, the rule helps ensure

underwriting practices are reasonable.

For example, it will no longer be possible to originate loans based on stated income. You must

now verify the consumer’s income or assets and employment relied on in order to comply with

the ATR rule.

Likewise, the rule also requires you to underwrite loans with nontraditional features, such as

interest-only or negative-amortization periods, by considering the consumer’s ability to repay the

loan after the initial period.

For higher-priced balloon loans that do not meet the requirements of a balloon-payment QM,

you will need to underwrite the balloon payment itself, though balloon loans that are not higher-

priced do not have this requirement.

XII. What happens if a consumer has

trouble repaying a loan I

originate under the general ATR

rule? What happens if my

organization violates the

regulation?

Whether or not you complied with the ATR requirements is based on the information available

during origination.

For example, you are not in violation of the ATR requirements if consumers cannot repay their

mortgage loans solely because they experienced a sudden and unexpected job loss after you

originated the loan. The ATR determination applies to information known at or before

consummation.

However, if consumers have trouble repaying a loan you originate, they could claim that you

failed to make a reasonable, good-faith determination of their ATR before you made the loan. If

the consumers prove this claim in court, you could be liable for, among other things, up to three

years of finance charges and fees the consumers paid as well as the consumers’ legal fees.

There is a three-year statute of limitations on ATR claims brought as affirmative cases. After

three years, consumers can bring ATR claims only as setoff/recoupment claims in a defense to

foreclosure.

XIII. Which types of creditors and loan

programs are exempt from the

ability-to-repay requirements?

(§ 1026.43(a)(3)(iv) to (vi))

Extensions of credit made by certain types of creditors are exempt from the ATR requirements.

 Extensions of credit made by creditors designated by the U.S. Department of the

Treasury as Community Development Financial Institutions and creditors designated by

HUD as either a Community Housing Development Organization or a Downpayment

Assistance Provider of Secondary Financing are exempt from the ATR requirements,

under certain conditions.

 Extensions of credit made by creditors designated as nonprofit organizations under

section 501(c)(3) of the Internal Revenue Code of 1986 that extend credit no more than

200 times annually, provide credit only to low-to-moderate income consumers, and

follow their own written procedures to determine that consumers have a reasonable

ability to repay their loans are also generally exempt from the ATR requirements.

Extensions of credit made pursuant to certain loan programs are exempt from the ATR

requirements.

 Extensions of credit made by housing finance agencies directly to consumers, as well as

extensions of credit made by other creditors pursuant to a program administered by a

housing finance agency, are exempt from the ATR requirements. This ATR exemption

applies to extensions of credit made pursuant to a program administered by a housing

finance agency, regardless of the funding source (e.g., Federal, State, or other sources).

 Extensions of credit made pursuant to an Emergency Economic Stabilization Act

program, such as extensions of credit made pursuant to a State Hardest Hit Fund

program, are also exempt from the ATR requirements.

The exemptions above apply to all loans made by these creditors or pursuant to these loan

programs, provided the conditions for the exemption are satisfied. An exempt loan remains

exempt even if it is sold, assigned, or otherwise transferred to a creditor that would not qualify

for the exemption.

Note that the ATR requirements do not apply to these loans. Thus, a loan that is eligible for

one of these exemptions is not eligible for QM status, as the QM provisions are only applicable

to loans subject to the ATR requirements. A consumer who obtained a loan that was exempt

from the ATR requirements would have no ability-to-repay claim under the ATR/QM rule.

Please note that although these loans are not subject to the ATR requirements, they still are

subject to the restrictions on prepayment penalties discussed on page 42 and may not be

structured as open-end credit plans to evade those restrictions.

About Qualified 4.

Mortgages

I. What is a Qualified Mortgage?

(§ 1026.43(e) and (f))

The rule provides a presumption that creditors that originate Qualified Mortgages (QMs) have

complied with the ATR requirements. That means a court will treat a case differently if a

consumer files an ATR claim where the loan is a QM. Creditors will be presumed to have

complied with the ATR requirements if they issue QMs. The QM standard helps protect

consumers from unduly risky mortgages. It also gives you more certainty about potential liability.

There are four types of Qualified Mortgages under the rule. Two types, the General and

Temporary QM definitions, can be originated by all creditors. Two other types, Small Creditor

and Balloon-Payment QMs, can only be originated by small creditors. (See “Are there different types

of QMs?” on page 31.)

The QM requirements generally focus on prohibiting certain risky features and practices, such as

negative amortization and interest-only periods and loan terms longer than 30 years.

In addition, for all types of QMs, points and fees generally may not exceed 3 percent of the total

loan amount, but higher thresholds are provided for loans below $100,000. (See “What are the QM

points-and-fees caps and what do I include when calculating points and fees?” on page 37.)

The type of presumption of compliance for a QM depends on whether it is higher-priced.

Qualified Mortgages under the General and Temporary definitions are considered higher-priced

if they have an APR that exceeds the APOR by 1.5 percentage points or more for first-lien loans

and 3.5 percentage points or more for subordinate-lien loans. Small Creditor and Balloon-

Payment QMs are considered higher-priced if they have an APR that exceeds the APOR by 3.5

percentage points or more for both first-lien and subordinate-lien loans.(See “What makes a QM

loan higher-priced?” on page 30.)

If a loan that is not higher-priced satisfies the QM criteria, a court will conclusively presume

that you complied with the ATR rule.

If a higher-priced loan meets the QM criteria, a court will presume it complies with the ATR

requirements, but the consumer may rebut the presumption.

II. What is the difference between

safe harbor and rebuttable

presumption in terms of liability

protection? (§ 1026.43(e)(1))

QMs can receive two different levels of protection from liability. Which level they receive

depends on whether the loan is higher-priced or not. (See “What makes a QM loan higher-priced?” on

page 30.)

i. Safe harbor

QMs that are not higher-priced have a safe harbor, meaning that they are conclusively

presumed to comply with the ATR requirements.

Under a safe harbor, if a court finds that a mortgage you originated was a QM, then that finding

conclusively establishes that you complied with the ATR requirements when you originated the

mortgage.

For example, a consumer could claim that in originating the mortgage you did not make a

reasonable and good-faith determination of repayment ability and that you therefore violated the

ATR rule. If a court finds that the loan met the QM requirements and was not higher-priced, the

consumer would lose this claim.

The consumer could attempt to show that the loan is not a QM (for example, under the General

QM definition that the DTI ratio was miscalculated and exceeds 43 percent), and therefore is not

presumed to comply with the ATR requirements. However, if the loan is indeed a QM and is not

higher-priced, the consumer has no recourse under this regulation.

ii. Rebuttable presumption

QMs that are higher-priced have a rebuttable presumption that they comply with the ATR

requirements, but consumers can rebut that presumption.

Under a rebuttable presumption, if a court finds that a mortgage you originated was a higher-

priced QM, a consumer can argue that you violated the ATR rule. However, to prevail on that

argument, the consumer must show that based on

the information available to you at the time

the mortgage was made, the consumer did not have enough residual income left to meet living

expenses after paying their mortgage and other debts

The rebuttable presumption provides more legal protection and certainty to you than the general

ATR requirements, but less protection and certainty than the safe harbor.

III. What makes a QM loan higher-

priced? (§ 1026.43(b)(4))

A Qualified Mortgage under the General or Temporary definition is higher-priced if:

 It is a first-lien mortgage for which, at the time the interest rate on the loan was set, the

APR was 1.5 percentage points or more over the Average Prime Offer Rate (APOR).

 It is a subordinate-lien mortgage with an APR that, when the interest rate was set,

exceeded the APOR by 3.5 percentage points or more.

For example, if the APOR is 5 percent at the time when the interest rate on a mortgage is set,

then a first-lien mortgage is higher-priced if it has an APR of 6.5 percent or more.

A Small Creditor or Balloon-Payment QM is higher-priced if:

 It has an APR that, when the interest rate

was set, exceeded the APOR by 3.5

percentage points or more, for both first-

lien and subordinate-lien mortgages.

 For example, if the APOR is 5 percent at

the time when the interest rate on a

mortgage is set, a mortgage that is a Small

Creditor Qualified Mortgage is higher-

priced if it has an APR of 8.5 percent or

more, regardless of whether it is first- or

subordinate-lien loan.

 To calculate whether a loan’s APR exceeds the APOR for a comparable loan by

more than the relevant 1.5 or 3.5 percentage-point spread, you may use the rate-

spread calculators and other guidance available online at

http://www.ffiec.gov/ratespread/

Implementation Tip: This

special definition of higher-

priced for

Small Creditor and Balloon-Payment

QMs only determines whether a loan

has a safe harbor or rebuttable

presumption of compliance with the

ATR requirements. It does not affect

whether a loan is a “higher-priced

mortgage loan” (HPML) under other

Bureau rules and does not exempt a

loan from other requirements for

HPMLs.

IV. Are there different types of QMs?

There are four types of QMs. Two types of QMs, the General and Temporary QM definitions,

can be originated by any creditor, regardless of the creditor’s size. Two additional types of QMs,

Small Creditor and Balloon-Payment QMs, can be originated only by small creditors.

For all four types, QMs that are higher-priced receive a rebuttable presumption and QMs that

are not higher-priced receive safe harbor status. However, the definition of “higher-priced” is

different for Small Creditor and Balloon-Payment QMs. (See “What makes a QM loan higher priced?”

on page 30.)

Some requirements are common across all four types of QM. These requirements include:

 A prohibition on negative amortization or interest-only payments

 A prohibition on loan terms in excess of 30 years

 Limitations on points and fees: The threshold is generally 3 percent of the loan balance,

but larger amounts are allowed for loans under $100,000 (See “What are the QM points-and-

fees caps and what do I include when calculating points and fees?” on page 37.)

V. What types of QMs can all

creditors originate?

There are two types of Qualified Mortgage that all creditors are eligible to originate.

i. Type 1: General QM definition (§ 1026.43(e)(2))

General QM loans may not have negative-amortization, interest-only, or balloon-payment

features or terms that exceed 30 years. They also may not have points and fees that exceed the

specified limits.

In addition, in order for a loan to be a General QM loan,

the creditor must:

 Underwrite based on a fully-amortizing schedule

using the maximum rate permitted during the

first five years after the date of the first periodic

payment

Implementation Tip: Although

consideration and verification of a

consumer’s credit history is not

specifically incorporated into the

General QM definition, you must

verify a consumer’s debt obligations

using reasonably reliable third-party

records, which may include use of a

credit report or records that evidence

nontraditional credit references.

 Consider and verify the consumer’s income or

assets, current debt obligations, alimony and

child-support obbligations

 Determine that the consumer’s total monthly

debt-to-income ratio is no more than 43 percent,

using the definitions and other requirements

provided in appendix Q, which is derived from

the Federal Housing Administration manual

ii. Type 2: Temporary QM definition

(§ 1026.43(e)(4))

The rule also extends QM status to certain loans that are originated during a transitional period if

they are eligible for purchase or guarantee by Fannie Mae or Freddie Mac (the government-

sponsored enterprises (GSEs)) or for insurance or guarantee by certain federal agencies. Loans

that receive QM status under the temporary provision will retain that status after the temporary

provision expires, but new loans will not receive QM status after that date under the temporary

provision. So, after expiration of the temporary provision, loans must meet the requirements for

one of the other categories of Qualified Mortgages to be QMs.

The temporary provision expires, for loans eligible for purchase or guarantee by the GSEs, on

the date that the GSEs exit federal conservatorship or receivership or on January 10, 2021,

whichever occurs first.

The temporary provision for loans eligible for insurance or guarantee by specified federal

agencies is a transition measure designed to give the agencies time to exercise separate authority

under the Dodd-Frank Act to determine which of their loans will receive QM status. This

temporary provision will expire on the date that the relevant agency’s own QM rules take effect

or on January 10, 2021, whichever occurs first.

Loans falling under the Temporary QM definition must meet the same requirements as

General QM loans regarding prohibitions on risky features (negative-amortization, interest-only,

and balloon-payment features), a maximum loan term of 30 years, and points-and-fees

restrictions.

They must also meet at least one of these additional requirements:

 Eligible for purchase or guarantee by the Federal National Mortgage Association (Fannie

Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) while operating

under federal conservatorship or receivership

 Eligible for Federal Housing Administration (FHA) insurance

Implementation Tip: When

appendix Q does not resolve how a

specific type of debt or income

should be treated, creditors may rely

on guidelines of the GSEs or certain

federal agencies (listed below under

“Temporary QM definition”) to

resolve the issue. However, a

creditor may not rely on GSE or

agency guidelines where such

guidelines are in conflict with

appendix Q standards.

 Eligible to be guaranteed by the U.S. Department of Veterans Affairs (VA)

 Eligible to be guaranteed by the U.S. Department of Agriculture (USDA)

 Eligible to be insured by the Rural Housing Service

Eligibility for purchase or guarantee by a GSE or insurance or guarantee by an agency can be

established based on the following methods:

 Valid recommendation from a GSE Automated Underwriting System (AUS) or an AUS

that relies on an agency underwriting tool

 GSE or agency guidelines contained in official manuals

 Written agreements between a GSE or agency and the creditor (or a direct sponsor or

aggregator of the creditor)

 Individual loan waivers from a GSE or agency

To meet the Temporary QM definition, loans must be underwritten using the required guidelines

of the entities above, including any relevant DTI guidelines. They do not have to meet the 43

percent debt-to-income ratio threshold that applies to General QM loans.

The creditor does not have to satisfy GSE or agency standards which are wholly unrelated to the

credit risk or underwriting of the loan or any standards which apply after the consummation of

the loan.

VI. What types of QMs can small

creditors originate?

Small creditors can originate Qualified Mortgages under the General and Temporary QM

definitions discussed above. In addition, there are two additional types of Qualified Mortgages

that can only be originated by small creditors.

You can make these types of QMs only if you meet both of the following requirements:

 You had assets below $2 billion (to be adjusted annually for inflation by the Bureau) at

the end of the last calendar year.

 You and your affiliates together originated no more than 500 first-lien, closed-end

residential mortgages that are subject to the ATR requirements in the preceding calendar

year.

An affiliate is any company that controls, is controlled by, or is under common control with,

your company. This generally means that your affiliates are your parent company, your

subsidiaries, and your sister companies. For example, if your organization is a bank owned by a

bank holding company that also owns another bank, both the bank holding company and the

other bank are your bank’s affiliates.

To determine if you meet the asset size requirement, count only your assets. Do not count your

affiliate’s assets.

To determine if you meet the number of originations requirement, count all first-lien, closed-end

mortgages made by you and made by your affiliates that are subject to the ATR requirements.

Do not count subordinate-lien mortgages. Also do not count mortgages that are not subject to

the ATR/QM rule, such as HELOCs, time-share plans, reverse mortgages, or temporary or

bridge loans with terms of 12 months or less. (See “What transactions are covered by the ATR/QM

rule?” on page 12.)

i. Type 1: Small Creditor QM (§ 1026.43(e)(5))

Small Creditor QM loans may not have negative-amortization, interest-only, or balloon-payment

features or terms that exceed 30 years. They also may not have points and fees that exceed the

specified QM limits. (See “What are the QM points-and-fees caps and what do I include when calculating

points and fees?” on page 37.)

In addition, in order for a loan to be a Small Creditor QM loan:

 You must underwrite based on a fully-amortizing schedule using the maximum rate

permitted during the first five years after the date of the first periodic payment.

 The loan must not be subject to a forward commitment (an agreement made at or prior

to consummation of a loan to sell the loan after consummation, other than to a creditor

that itself is eligible to make Small Creditor QMs).

 You must consider and verify the consumer’s income or assets, and debts, alimony, and

child support.

 You must consider the consumer’s debt-to-income ratio (DTI) or residual income,

although the rule sets no specific threshold for DTI or residual income.

Small Creditor QMs generally lose their QM status if you sell or otherwise transfer them less

than three years after consummation. However, a Small Creditor QM keeps its QM status if it

meets one of these criteria:

 It is sold more than three years after consummation.

 It is sold to another creditor that meets the criteria regarding number of originations and

asset size, at any time.

 It is sold pursuant to a supervisory action or agreement, at any time.

 It is transferred as part of a merger or acquisition of or by the creditor, at any time.

ii. Type 2: Balloon-Payment QM (§ 1026.43(e)(6)

and(f))

The Bureau is providing a two-year transition period during which all small creditors can make

Balloon-Payment QMs, regardless of where the small creditor operates. After that two-year

period expires, only small creditors that operate predominantly in rural or underserved areas will

be able to make Balloon-Payment QMs. On or before January 10, 2016 (two years after the

effective date of the ATR/QM rule), you can originate Balloon-Payment QMs if you satisfy the

asset size and number of originations requirements. Balloon-Payment QMs that are originated

during this two-year period will retain their QM status after January 10, 2016, assuming the

requirements to hold the loan in portfolio are met.

After January 10, 2016, you can originate Balloon-

Payment QMs only if you meet the asset size and

number of originations criteria as well as a

requirement that you operate predominantly in rural or

underserved areas.

Balloon-Payment QMs must not have negative-

amortization or interest-only features and must comply

with the points-and-fees limits for Qualified Mortgages.

In addition:

 The loan must have a fixed interest rate and

periodic payments (other than the balloon

payment) that would fully amortize the loan over

30 years or less.

 The loan must have a term of five years or longer.

 The loan must not be subject to a forward

commitment (an agreement made at or prior to

consummation of a loan to sell the loan after

consummation, other than to a creditor that itself

is eligible to make Balloon-Payment QMs).

Implementation Tip: After

January 10, 2016, in order to make

Balloon-

Payment QMs, more than half

of your organization’s first-

lien covered

transactions during any of the three

preceding calendar years must have

been secured by properties in rural

areas (equivalent to the USDA’s

Economic Research Service Urban

Influence Codes 4, 6, 7, 8, 9, 10, 11, or

12) or underserved areas (counties

where no more than two creditors

extend five or more first-lien covered

transactions in a calendar year). The

Bureau will publish an annual list of

rural or underserved counties. This is

not the same definition of “rural” used

for Home Mortgage Disclosure Act

(HMDA) reporting or used by other

agencies. For example, you may not be

considered rural under this definition

even though you are considered rural

under HMDA and are not a HMDA

reporter.

 You must determine that the consumer will be able to make the scheduled periodic

payments (including mortgage-related obligations) other than the balloon payment.

Unlike the calculation of balloon loan monthly payments for determining ATR (See

“Calculating payments under the ATR standard for the loan you are underwriting: § 1026.43(c)(5)”

on page 22), the Balloon-Payment QM calculation excludes the balloon payment even if

the loan is a higher-priced loan,

 You must consider and verify the consumer’s income or assets, and debts, alimony, and

child support.

 You must consider the consumer’s debt-to-income ratio (DTI) or residual income,

although the rule sets no specific threshold for DTI or residual income.

Like Small Creditor QMs, Balloon-Payment QMs generally lose their QM status if you sell or

otherwise transfer them less than three years after consummation. However, a Balloon-Payment

QM keeps its QM status if it meets one of these criteria:

 It is sold more than three years after consummation.

 It is sold to another creditor that meets the criteria regarding operating in rural or

underserved areas, number of originations, and asset size, at any time.

 It is sold pursuant to a supervisory action or agreement, at any time.

 It is transferred as part of a merger or acquisition of or by the creditor, at any time.

VII. Are there special requirements

for calculating the DTI ratio on

QM loans? (§ 1026.43(e)(2)(vi)

and appendix Q)

As described above, the General QM definition requires that a consumer’s total debt-to-income

ratio not exceed 43 percent. Section 1026.43(e)(2)(vi) and appendix Q of the ATR/QM rule

contain the definitions of debt and income for purposes of the General QM definition.

Keep in mind that different DTI rules apply to loans complying under the ATR standard and to

the other QM definitions:

 To satisfy the general ATR standard, you must consider DTI or residual income.

 To originate a QM under the temporary definition (eligible for sale to or guarantee by a

GSE or insured or guaranteed by a specified federal agency), you must meet the relevant

entity’s applicable DTI and other requirements.

 To originate a Small Creditor or Balloon-Payment QM, you must consider DTI or

residual income, but you do not have to meet a specific threshold requirement.

VIII. What are the QM points-and-fees

caps and what do I include when

calculating points and fees?

(§§ 1026.32(b)(1) and

1026.43(e)(3))

For a loan to be a QM, the points and fees may not exceed the points-and-fees caps. The points-

and-fees caps are higher for smaller loans.

 3 percent of the total loan amount for a loan greater than or equal to $100,000

 $3,000 for a loan greater than or equal to $60,000 but less than $100,000

 5 percent of the total loan amount for a loan greater than or equal to $20,000 but less

than $60,000

 $1,000 for a loan greater than or equal to $12,500 but less than $20,000

 8 percent of the total loan amount for a loan less than $12,500

The dollar amounts listed above will be adjusted annually for inflation and published each year in

the commentary to Regulation Z. (See §

1026.43(e)(3)(ii) and accompanying Commentary.)

To determine whether a loan is within the QM points-and-fees caps, follow these steps:

 First, determine which of the caps applies to the loan amount on the face of the note.

 Second, calculate the maximum points and fees for that loan amount:

 For a loan amount that has a fixed-dollar cap (for example, $3,000 for loan amounts of

$60,000 but less than $100,000), that fixed-dollar cap is the maximum allowable points

and fees.

 For a loan amount that has a percentage cap (for example, 5 percent of the total loan

amount for loan amounts greater than or equal to $20,000 but less than $60,000)

determine the “total loan amount” for your transaction. The total loan amount equals

the “amount financed” (§ 1026.18) minus any points and fees that are rolled into the

loan amount. Multiply the total loan amount by the percentage cap to determine the

maximum allowable points and fees.

 Finally, calculate the total points and fees for your transaction. If the total points and

fees for your transaction exceed the maximum allowable points and fees, then the loan

cannot be a QM.

i. Points-and-fees calculation (§ 1026.32(b)(1))

To calculate points and fees for the QM points-and-fees caps, you will use the same approach

that you use for calculating points and fees for closed-end loans under the Home Ownership and

Equity Protection Act (HOEPA) thresholds in the Bureau’s High-Cost Mortgage and

Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and

Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act

(Regulation X) rulemakings. Those rules are available online at

http://www.consumerfinance.gov/regulations/

Unless specified otherwise, include amounts that are known at or before consummation, even

if the consumer pays them after consummation by rolling them into the loan amount.

In addition, unless specified otherwise, closing costs that you pay and recoup from the consumer

over time through the interest rate are not counted in points and fees.

To calculate points and fees, add together the amounts paid in connection with the transaction

for the six categories of charges listed below:

1. Finance charge (§ 1026.32(b)(1)(i))

In general, include all items included in the finance charge. (§ 1026.4(a) and (b)). However, you

may exclude the following types and amounts of charges, even if they normally would be

included in the finance charge:

 Interest or the time-price differential

 Mortgage insurance premiums (MIPs)

 Federal or state government-sponsored MIPs: For example, exclude up-front and annual

FHA premiums, VA funding fees, and USDA guarantee fees.

 Private mortgage insurance (PMI) premiums: Exclude monthly or annual PMI

premiums. You may also exclude up-front PMI premiums if the premium is refundable

on a prorated basis and a refund is automatically issued upon loan satisfaction. However,

even if the premium is excludable, you must include any portion that exceeds the up-

front MIP for FHA loans. Those amounts are published in HUD Mortgagee Letters,

which you can access on HUD’s website at

http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips

/letters/mortgagee/.

 A charge paid by a third party may be included in points and fees, but is not included in

points and fees under § 1026.32(b)(1)(i) if the exclusions to points and fees in

§ 1026.32(b)(1)(i)(A) through (F) apply. For example, seller’s points are not included in

points and fees under § 1026.32(b)(1)(i) as they are not included in the finance charge.

But they still may be included in points and fees under § 1026.32(b)(1)(ii) through (vi) –

for example, if they cover loan originator compensation, credit life insurance premiums,

or a prepayment penalty.

 Bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of

either (§ 1026.32(b)(1)(i)(D))

 In general, you may exclude these types of charges even if they would be included in the

finance charge. For example, you may exclude a bona fide charge imposed by a third-party

settlement agent (for example, an attorney) so long as neither the creditor nor the loan

originator (or their affiliates) retains a portion of the charge.

 However, you must still include any third-party charges that are specifically required to

be included under other provisions of the points-and-fees calculation (for example,

certain PMI premiums, certain real estate-related charges, and premiums for certain

credit insurance and debt cancellation or suspension coverage). Note that up-front fees

you charge consumers to recover the costs of loan-level price adjustments imposed by

secondary market purchasers of loans, including the GSEs, are not considered bona fide

third-party charges and must be included in points and fees.

 Bona fide discount points (§ 1026.32(b)(1)(i)(E), 32(b)(1)(i)(F), and 32(b)(3))

 Exclude up to 2 bona fide discount points if the interest rate before the discount does not

exceed the APOR for a comparable transaction by more than 1 percentage point; or

 Exclude up to 1 bona fide discount point if the interest rate before the discount does not

exceed the APOR for a comparable transaction by more than 2 percentage points.

Note that a discount point is “bona fide” if it reduces the consumer’s interest rate by an amount

that reflects established industry practices, such as secondary mortgage market norms. An

example is the pricing in the to-be-announced market for mortgage-backed securities.

2. Loan originator compensation (§ 1026.32(b)(1)(ii))

Include compensation paid directly or indirectly by a consumer or creditor to a loan originator

other than compensation paid by a mortgage broker, creditor, or retailer of manufactured homes

to an employee. Include compensation that is attributable to the transaction, to the extent that

such compensation is known as of the date the interest rate for the transaction is set. In general,

include the following:

 Compensation paid directly by a consumer

to a mortgage broker: Include the amount the

consumer pays directly to the mortgage broker.

If this payment is already included in points and

fees because it is included in the finance charge

under § 1026.32(b)(1)(i), it does not have to be

included again as loan originator compensation

under § 1026.32(b)(1)(ii).

 Compensation paid by a creditor to a mortgage broker: Include the amount the

creditor pays to the broker for the transaction. Include this amount even if the creditor

included origination or other charges paid by the consumer to the creditor as points and

fees under § 1026.32(b)(1)(i) as a finance charge or if the creditor does not receive an

up-front payment from the consumer to cover the broker’s fee but rather recoups the

fee from the consumer through the interest rate over time.

 Compensation paid by a consumer or creditor to a manufactured home retailer:

Include the amount paid by a consumer or creditor to a manufactured home retailer that

qualifies as a loan originator under § 1026.36(a)(1) for loan origination activities.

Compensation paid by the manufactured home retailer to its employees does not have

to be included. § 1026.32(b)(1)(ii)(D) and comment 32 (b)(1)(ii)-5.

 Compensation included in the sales price of a manufactured home: Include loan

originator compensation that the creditor has knowledge that loan originator

compensation is included in the sales price of a manufactured home. The creditor is not

required to investigate the sales price of a manufactured home to determine if the sales

price includes loan originator compensation. Comment 32(b)(1)(ii)-5.

3. Real estate-related fees (§ 1026.32(b)(1)(iii))

The following categories of charges are excluded from points and fees only if:

The charge is reasonable; 1.

The creditor receives no direct or indirect compensation in connection with the 2.

charge; and

Implementation Tip: In the

context of determining what loan

origination compensation must be

included in points and fees, the term

“mortgage broker” refers to both

brokerage firms and individual

brokers. Compensation paid by a

mortgage broker to an employee is

not included in points and fees.

The charge is not paid to an affiliate of the creditor. 3.

If one or more of those three conditions is not satisfied, you must include these charges in

points and fees even if they would be excluded from the finance charge:

 Fees for title examination, abstract of title, title insurance, property survey, and similar

purposes

 Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance

or settlement documents

 Notary and credit-report fees

 Property appraisal fees or inspection fees to assess the value or condition of the

property if the service is performed prior to consummation, including fees related to

pest-infestation or flood-hazard determinations

 Amounts paid into escrow or trustee accounts that are not otherwise included in the

finance charge (except amounts held for future payment of taxes)

4. Premiums for credit insurance; credit property insurance; other life, accident, health or

loss-of-income insurance where the creditor is beneficiary; or debt cancellation or

suspension coverage payments (§ 1026.32(b)(1)(iv))

Include premiums for these types of insurance that are payable at or before consummation even

if such premiums are rolled into the loan amount, if permitted by law.

You do not need to include these charges if they are paid after consummation (e.g., monthly

premiums).

Note that credit property insurance means insurance that protects the creditor’s interest in the

property. It does not include homeowner’s insurance that protects the consumer.

You do not need to include premiums for life, accident, health, or loss-of-income insurance if

the consumer (or another person designated by the consumer) is the sole beneficiary of the

insurance.

5. Maximum prepayment penalty (§ 1026.32(b)(1)(v))

Include the maximum prepayment penalty that a consumer could be charged for prepaying the

loan. To determine if you are permitted to charge a prepayment penalty, see “Can I charge

prepayment fees on a covered transaction?” below.

6. Prepayment penalty paid in a refinance (§ 1026.32(b)(1)(vi))

If you are refinancing a loan that you or your affiliate currently holds or is currently servicing,

then include any penalties you charge consumers for prepaying their previous loans.

7. Charges paid by third parties. (Comment 32(b)(1)-2))

Include charges paid by third parties that fall within the definition of points and fees in

§ 1026.32(b)(1)(i) through (vi) (discussed above), including charges included in the finance

charge. Charges paid by third parties that fall within the exclusions to points and fees in

§ 1026.32(b)(1)(i)(A) through (F) do not have to be included in points and fees. Seller’s points

are excluded from the finance charge (see § 1026.4(c)(5)) and therefore can be excluded from

points and fees, but charges paid by the seller should be included if they are for items listed as

points and fees in § 1026.32(b)(1)(ii) through (vi).

8. Creditor-paid charges. (Comment 32(b)(1)-2))

Charges paid by the creditor, other than loan originator compensation paid by the creditor that is

required to be included in points and fees under § 1026.32(b)(1)(ii), can be excluded from points

and fees.

IX. Can I charge prepayment fees on

a covered transaction?

(§ 1026.43(g))

If you wish to include a prepayment penalty option, you may only do so for fixed-rate or step-

rate QMs that are not higher-priced and only when applicable law otherwise permits the

prepayment penalty.

Note that the definition of prepayment penalty does not include certain bona fide third-party

charges that were waived at consummation (and expected to be reimbursed via the interest rate)

in cases where the consumer fully prepays the loan within three years and must repay the

charges.

Include the maximum prepayment penalty amount when you calculate the loan’s fees and points

to determine whether the points and fees exceed the limits discussed above. (See “What are the

QM points-and-fees caps and what do I include when calculating points and fees?” on page 37.)

You cannot impose a prepayment penalty after the first three years of the loan term.

A prepayment penalty also cannot be greater than:

 2 percent of the outstanding loan balance prepaid during the first two years of the loan

 1 percent of the outstanding loan balance prepaid during the third year of the loan

If you wish to charge a prepayment fee, you must also offer the consumer an alternative

transaction that you believe the consumer will qualify for. The alternative loan cannot

have a prepayment penalty. The alternative loan must be similar to the loan with the prepayment

penalty, so the consumer can choose between two products he will likely qualify for.

The alternative loan:

 Must be a fixed-rate or graduated-payment loan and must match the rate type from the

loan with the prepayment penalty

 Must have the same term as the mortgage with the prepayment penalty

 Cannot have deferred principal, balloon or interest-only payments, or negative

amortization

When your organization is a broker or table-funds loans and you want to use the safe harbor for

compliance with anti-steering rules for loan originators under § 1026.36(e) of Regulation Z, you

must show the consumer:

 The loan with the lowest interest rate overall

 The loan with the lowest interest rate with a

prepayment penalty

 The loan with the lowest total origination points

or fee and discount points

Implementation Tip: The

alternative loans do not have to

come from the same secondary

market partner. You may show the

consumer alternative loans from

more than one investor or

aggregator.

Refinancing from 5.

Non-Standard to

Standard Loans: ATR

Special Circumstance

(§ 1026.43(d))

I. Do the standard ATR

requirements apply when I

refinance consumers from a non-

standard to a standard loan?

(§ 1026.43(d)(1)(ii)(A))

Many consumers have adjustable-rate, interest-only, or negative-amortization loans that they may

not be able to afford when the loan recasts. To give you more flexibility to help these

homeowners refinance, the ATR/QM rule gives you the option to refinance your current

mortgage customers from a non-standard mortgage (which includes various types of

mortgages that can lead to payment shock and can result in default) into a standard mortgage

without having to meet the rule’s ATR requirements including considering the eight underwriting

factors required for ATR.

This option applies only to mortgages your organization holds or services. Subservicers and third

parties cannot use it.

You can use this option only when:

 The payments under the refinance will not cause the consumer’s principal balance to

increase.

 The consumer uses the proceeds to pay off the original mortgage and for closing or

settlement charges appearing on the HUD-1 settlement statement. The consumer takes

out no cash.

 The consumer’s monthly payment will materially decrease (i.e., at least 10 percent).

 The consumer has only one 30-day late payment in the past 12 months and no late

payments within six months.

 The consumer’s written application for the standard mortgage is received no later than

two months after the non-standard mortgage has recast.

 You have considered whether the standard mortgage likely will prevent the consumer

from defaulting on the non-standard mortgage once the loan is recast.

 If the non-standard mortgage was consummated on or after January 10, 2014, the non-

standard mortgage was made in accordance with the rule’s Ability-to-Repay

requirements or Qualified Mortgage provisions, as applicable.

The new loan has to meet these guidelines:

 The loan cannot have deferred principal,

negative amortization, or balloon payments.

 Points and fees must fall within the thresholds

for Qualified Mortgages.

 The loan term cannot exceed 40 years.

 The interest rate must be fixed for at least the

first five years of the loan.

Implementation Tip: The

ATR/QM rule does not apply when you

alter an existing loan without refinancing

it. So you can provide a loan modification

to a defaulted (or non-defaulted)

consumer without complying with ATR.

You can find a discussion of what

changes to a loan will be treated as a

modification rather than a refinancing in

Regulation Z at § 1026.20(a).

II. How do I calculate non-standard

and standard payment amounts

to determine whether the

consumer’s monthly payment on

the standard mortgage will

represent a material decrease?

(§ 1026.43(d)(5))

To calculate payments when comparing non-standard loans to standard loans, first calculate the

payment the consumer will have to make if the non-standard loan reaches a recast point. Recast

occurs when:

 For an adjustable-rate mortgage, the introductory fixed-rate period ends.

 For an interest-only loan, the interest-only period ends.

 For a negatively-amortizing loan, the negatively-amortizing payment period ends.

Then calculate the payment for the standard loan, using the fully-indexed rate and the monthly

payment that will fully amortize the loan based on equal monthly payments.

Finally, compare the two payments. A material decrease must be evaluated in light of the facts

and circumstances for the particular loan. A payment reduction of 10 percent or more meets the

“materially lower” standard.

Note that the payment calculation for this special refinancing provision is slightly different from

the payment calculation used under the ATR/QM provisions. Under this special provision, you

must base the calculation of the maximum loan amount on the amount of principal that will be

outstanding at the time of recast, taking into account any principal payments that the consumer

will have made by that time.

Practical 6.

Implementation and

Compliance

Considerations

You should consult with legal counsel or your compliance officer to understand your obligations

under the rule, and to devise the policies and procedures you will need to have in place to

comply with the rule’s requirements.

How you comply with the rule may depend on your business model. When mapping out your

compliance plan, you should consider practical implementation issues in addition to

understanding your obligations under the rule. Your compliance plan may include:

1. Identifying affected products, departments, and staff

Creditors may offer some, or all, of the loan products discussed in the ATR/QM rule. To plan

for implementation of the rule, you should identify all products, departments, and staff affected

by the rule.

2. Identifying the business-process, operational, and technology changes that will be

necessary for compliance

The new requirements may affect a number of parts of your business systems and processes. The

forms and processes you use to communicate internally and externally may be affected by the

verification requirements. The systems and processes you use to underwrite loans may also be

affected. Secondary marketing and servicing processes and systems may be affected by the

special ATR provisions regarding the refinancing of a non-standard loan into a standard loan. It

is likely that as you originate new loans after January 10, 2014, you will want to identify those

loans on your transaction systems with their definitional status under the rule (i.e., ATR, QM),

which may involve creating new data element(s) within your processing systems. Likewise, if the

loan is a QM, you probably want to note which level of liability protection the loan is receiving,

which may have similar impacts.

Fully understanding the changes required may involve a review of your existing business

processes, as well as the hardware and software that you, your agents, or other business partners

use. Gap analyses may be a helpful output of such a review and help you to create a robust

implementation plan.

3. Identifying critical impacts on key service providers or business partners

Third-party updates may be necessary to obtain required information or verifications, update

disclosures, underwriting software, compliance and quality-control systems and processes; and

update records-management protocols.

Software providers, or other vendors and business partners, may offer compliance solutions that

can assist with any necessary changes. Identifying these key partners will depend on your

business model. For example, banks and credit unions may find it helpful to talk to their

correspondent banks, secondary market partners, and technology vendors. In some cases, you

may need to negotiate revised or new contracts with these parties, or seek a different set of

services.

If you seek the assistance of vendors or business partners, make sure you understand the extent

of the assistance that they provide. For example, if vendors provide software that calculates loan

cost to determine which transactions are higher-priced, do they guarantee the accuracy of their

conclusions?

The CFPB expects supervised banks and nonbanks to have an effective process for managing

the risks of service provider relationships. For more information on this, view

CFPB Bulletin

2012-03 Service Providers.

4. Identifying training needs

Consider what training will be necessary for your loan officers; secondary marketing, processing,

compliance, and-quality control staff; as well as anyone else who approves, processes, or

monitors credit transactions. Training may also be necessary for other individuals who are your

employees, or for the employees of your agents and business partners.

5. Considering other Title XIV rules

The ATR/QM rule is just one component of the Bureau’s Dodd-Frank Act Title XIV

rulemakings.

Other Title XIV rules include:

 2013 HOEPA Rule

 ECOA Valuations Rule

 TILA Higher-Priced Mortgage Loans Appraisal Rule

 Loan Originator Rule

 RESPA and TILA Mortgage Servicing Rules

 TILA Higher-Priced Mortgage Loans Escrow Rule

Each of these rules affects aspects of the mortgage industry and its regulation. Many of these

rules intersect with one or more of the others. Therefore, the compliance considerations for

these rules may overlap in your organization. You will find copies of these rules online at

http://www.consumerfinance.gov/regulations/

Other Resources 7.

I. Where can I find a copy of the

ATR/QM rule and get more

information about it?

You will find the January 2013 Final Rule on the Bureau’s website at

http://www.consumerfinance.gov/regulations/Ability-To-Repay-and-qualified-mortgage-

standards-under-the-truth-in-lending-act-regulation-z/.

In addition to a complete copy of the January 2013 Final Rule, that web page also contains:

 The preamble, which explains why the Bureau issued the rule; the legal authority and

reasoning behind the rule; responses to comments; and analysis of the benefits, costs,

and impacts of the rule

 Official Interpretations of the rule

 Links to final rule amendments, including the

June 2013 ATR/QM Concurrent Final

Rule, the July 2013 Final Rule, and the October 2013 Final Rule

 Other implementation support materials including videos, reference charts, and

proposed rule amendments

Useful resources related to regulatory implementation are also available at

http://www.consumerfinance.gov/regulatory-implementation/

For email updates about Bureau regulations and when additional Dodd-Frank Act Title XIV

implementation resources become available, please submit your email address within the “Email

updates about mortgage rule implementation” box at

http://www.consumerfinance.gov/regulatory-implementation/