Small entity compliance guide for the Ability-to-Repay and Qualified Mortgage rule

APRIL 10, 2013

SMALL ENTITY COMPLIANCE GUIDE

Ability-to-Repay and

Qualified Mortgage

Rule

Please refer to our concurrent proposal about

the changes we have proposed to this

rule. This notice proposes to amend the final

rule issued January 10, 2013, which is set to

take effect on January 10, 2014. The Bureau

is considering comments received and plans to

finalize the proposal as soon as possible.

Table of Contents

1. Introduction ............................................................................................. 5

I. What is the purpose of this guide? ..................................................... 7

II. Who should read this guide? ............................................................. 8

III. Who can I contact about this guide or the ATR/QM rule? .................. 8

2. Overview of the Ability-to-Repay/Qualified Mortgage Rule ................. 9

I. What is the ATR/QM rule about? ....................................................... 9

II. When do I have to start following this rule? ..................................... 10

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

.............................................................................................. 10

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

rule? (§ 1026.25(c)(3)) .......................................................... 11

3. About Ability to Repay .......................................................................... 12

I. What is the general ATR standard? (Comment 1026.43(c)(1)-2) .... 12

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

verify under the rule? (Comment 1026.43(c)(2)-4) ................ 12

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

records? (Comment 1026.43(c)(3)-4) ................................... 13

IV. What is a reasonably reliable third-party record? (§ 1026.43(c)(3)) . 15

V. How do I determine ATR? (§ 1026.43(c)(1)) .................................... 16

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

with a debt-to-income (DTI) threshold? (§ 1026.43(c)(2)(vii))17

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

when determining ATR? ....................................................... 17

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

employment, and credit history? ........................................... 18

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

determining ATR? ................................................................. 20

X. How do I calculate, consider, and confirm debt information? ........... 20

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

(§ 1026.43(c)(2) and (5)) ....................................................... 23

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? ......................................................... 24

4. About Qualified Mortgages .................................................................. 25

I. What is a Qualified Mortgage? (§ 1026.43(e), (f)) ............................ 25

II. What is the difference between safe harbor and rebuttable

presumption in terms of liability protection? (§ 1026.43(e)(1))

.............................................................................................. 26

III. What makes a QM loan higher-priced? (§ 1026.43(b)(4)) ............... 27

IV. Are there different types of QMs? .................................................... 27

V. Are there special requirements for calculating the DTI ratio on QM

loans? (§ 1026.43(e)(2)(vi) and appendix Q) ........................ 30

VI. 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)) ....................................................................... 31

VII. Can I charge prepayment fees on a covered transaction?

(§ 1026.43(g)) ....................................................................... 35

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

Circumstance (§ 1026.43(d)) ................................................................ 37

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)) .......................................................... 37

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)) ....................................................................... 39

6. Proposed Changes to the Ability-to-Repay/Qualified Mortgage Rule

............................................................................................................... 40

I. Is the Bureau considering any proposed changes in the ATR/QM

rule? ...................................................................................... 40

7. Practical Implementation and Compliance Considerations .............. 42

8. Other Resources ................................................................................... 45

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

information about it? ............................................................. 45

1. Introduction

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

ATR/QM provisions of the Dodd-Frank Act. 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) – such as 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 threshold.

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

in rural and underserved areas, there are also special provisions for rural balloon-payment

Qualified Mortgages held in portfolio by small creditors operating in rural or underserved areas.

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.

The Bureau has issued a proposal to exempt certain transactions from the ATR rule, to create a

fourth Qualified Mortgage category for certain loans made and held in portfolio by small

creditors including community banks and credit unions, and to provide additional guidance on

certain issues relating to the points-and-fees calculations for Qualified Mortgages. The proposal

is discussed further below.

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, including the Official Interpretations, is available at

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

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

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 where to find some additional

resources.

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?

For more information on the rule content, please contact the Bureau’s Office of Regulations at

202-435-7700, or email questions to [email protected].

Email comments about the guide to [email protected]. 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

2. Overview of the 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)

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

construction-to-permanent loan

Implementation Tip:

he 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 sub

ect to the

ruth in Lending Act, it is not sub

ect

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.

 Consumer credit transactions secured by vacant land

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.

3. About Ability to 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:

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

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

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

consumer’s ability to repay)

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

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 20 for special rules for calculating payments for interest-only,

negative-amortization, and balloon loans.)

4. Monthly payment on any simultaneous loans secured by the same property

5. Monthly payments for property

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

6. Debts, alimony, and child-

support obligations

7. Monthly debt-to-income ratio or

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

8. Credit history

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

nternal controls that

consider these factors. However, you

should check your policies and

procedures to ensure 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.

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)

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

 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

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.

 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.

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:

1. The loan you are underwriting

2. Any simultaneous loans secured by the same property

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

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

or leasehold payments; and special assessments

4. Current debt obligations, alimony, and child support

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.

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

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

o 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 under certain conditions.

 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 19 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.

4. About Qualified

Mortgages

I. What is a Qualified Mortgage?

(§ 1026.43(e), (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 different types of Qualified Mortgages under the rule. The QM requirements generally

focus on prohibiting certain risky features and practices (such as negative amortization and

interest-only periods). QMs generally will be provided to consumers who have a total debt-to-

income ratio (rather than a more limited housing debt-to-income ratio) less than or equal to 43

percent.

For 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 31.)

When you originate a QM, you must also underwrite based on a fully-amortizing schedule using

the maximum rate permitted during the first five years of the loan.

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

which is generally defined as having 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. (See “What

makes a QM loan higher-priced?” on page 27.)

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 27.)

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). If the loan is a QM that 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 QM loan 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.

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/.

IV. Are there different types of QMs?

There are three types of QMs. For all three types, QMs that are higher-priced receive a

rebuttable presumption and QMs that are not higher-priced receive safe harbor status.

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

 A prohibition on negative amortization or interest-only payments

 A prohibition on balloon payments on two of the three types of QMs

 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 31.)

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 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

 Consider and verify the

consumer’s income or assets,

current debt obligations, alimony

and child-support obligations

 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.

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.

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

 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

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

guidelines of the entities above. They do not have to meet the 43 percent debt-to-income ratio

threshold that applies to General QM loans.

iii. Type 3: Balloon-Payment QM (§ 1026.43(f))

You can make QMs that have a balloon-payment feature only if you meet the following

requirements:

 More than half of your organization’s first-lien covered transactions in the prior

calendar year 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.

 Your organization must have assets below $2 billion (to be adjusted annually for

inflation by the Bureau).

 Your organization (including affiliates) must have originated no more than 500 first-

lien covered transactions in the preceding calendar year.

Loans falling under the Balloon-Payment QM provisions 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).

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

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

 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.

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.

V. 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 two 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 balloon-payment QM, you must consider DTI or residual income,

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

VI. 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:

o 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.

o 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” (see § 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.

o 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 (see § 1026.4(a), (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)

o Federal or state government-sponsored MIPs: For example, exclude up-front

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

o 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

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

/hudclips/letters/mortgagee/.

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

affiliate of either (§ 1026.32(b)(1)(D))

o 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.

o 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).

o 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) and (F) and (b)(3))

o 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

o 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

(for example, a mortgage broker or a retail loan officer) 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. Salaries and other types of compensation that are dependent on other factors (for example,

long-term performance of the loan originator’s loans) are not “attributable to the transaction.” 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.

 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 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 creditor to retail loan officers: Include the amount the

creditor pays to its loan officer employees for their work on the transaction.

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

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

1. The charge is reasonable;

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

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

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.

VII. 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 31.)

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.

5. Refinancing from 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 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.

6. Proposed Changes to

the Ability-to-

Repay/Qualified

Mortgage Rule

I. Is the Bureau considering any

proposed changes in the ATR/QM

rule?

At the same time the Bureau issued the final ATR/QM rule, the Bureau also proposed two

important changes to that rule.

 First, the Bureau proposed exempting certain community-focused creditors and

foreclosure-prevention, homeownership-stabilization, and refinancing programs

from the ATR/QM rule.

 Second, the Bureau proposed certain changes to facilitate lending by small creditors,

including but not limited to small creditors operating predominantly in rural or

underserved areas.

The Bureau also sought public comment on guidance for calculating loan originator

compensation for the QM points-and-fees test. In particular, the proposal sought public

comment on guidance for determining if loan originator compensation should not be included in

points and fees where it already has been captured through other charges that are included in

points and fees.

The proposal is available on the Bureau’s website at

http://files.consumerfinance.gov/f/201301_cfpb_concurrent-proposal_ability-to-repay.pdf.

The Bureau expects to finalize the proposal, after considering public comment, well before the

effective date of the ATR/QM rule on January 10, 2014. The Bureau understands that creditors

that may be affected by the proposal are concerned that the proposal be finalized as soon as

possible so they can plan for the future.

The final rule could be different from the proposal. For example, a creditor that would have

been exempt under the proposal might not be exempt under the final rule.

Do not rely on the proposed rule for compliance-planning purposes.

7. Practical 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?

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 Compensation Rule

 Mortgage Servicing Rules

 TILA 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/.

8. Other Resources

I. Where can I find a copy of the

ATR/QM rule and get more

information about it?

You will find the 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 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

 A summary of the rule

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” box at http://www.consumerfinance.gov/regulations/.