July 25, 2014

Consumer Financial Protection Bureau Releases Final Qualified Mortgage Rule and Proposed Amendments to Ability to Repay Rule

On January 10, the Consumer Financial Protection Bureau (CFPB) released a final rule (ATR Rule) to implement provisions related to the ability to repay (ATR) standards and the definition of a “qualified mortgage” (QM) as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The final rule becomes effective in January 2014.

With respect to the ATR Rule, the final rule describes certain minimum requirements for creditors in making ability-to-repay determinations. The eight underwriting factors a residential mortgage lender must consider include: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Although such factors must be considered, no particular underwriting models are required.

As set forth in the Dodd-Frank Act, QMs are entitled to a presumption that the creditor making the loan satisfied the ATR rules. The final rule provides a safe harbor for loans that satisfy the definition of a QM and are not “higher priced” as generally defined in a prior Federal Reserve rule. Specifically, consumers could show a violation of the ATR requirements with regard to a subprime qualified mortgage if they were able to show that, when the loan was originated, the consumer’s income and debt obligations left insufficient residual income or assets to meet living expenses. For higher-priced mortgage loans, there is a rebuttable presumption with respect to the QM definition. With respect to prime loans, if certain QM criteria are satisfied, it will be conclusively presumed that the creditor made a good faith and reasonable determination of the consumer’s ability to repay.

Certain residential mortgage loans cannot be QMs. Those include mortgages with negative amoritization schedules, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, “no doc” loans cannot be QMs. Finally, residential mortgage loans where the points and fees paid by a consumer exceed 3% of the total loan amount are generally prevented from being QMs. With respect to underwriting criteria, a QM must have monthly payments calculated based on the highest payment that will apply in the first five years of the loan and that the consumer has a total debt-to-income ratio (DTI) that is less than or equal to 43%. For loans where the DTI is above 43%, the CFPB believes that those need to be evaluated on an individual basis rather than in the blanket presumption that the ATR requirements have been met.

Simultaneously with the release of the ATR Rule, the CFPB also issued proposed exemptions and modifications to the rule for public comment. Specifically, the CFPB proposes to exempt from the ATR Rule extensions of credit made (i) pursuant to a program administered by a housing finance agency, (ii) by certain types of nonprofit creditors (including those designated as Community Development Financial Institutions by the Department of Treasury) and (iii) pursuant to an Emergency Economic Stabilization Act program (such as extensions of credit made pursuant to a State Hardest Hit Fund program). In addition, the proposal exempts from the ATR requirements a refinancing that is (i) eligible to be insured, guaranteed or made pursuant to a program administered by the Federal Housing Administration, US Department of Veteran Affairs or the US Department of Agriculture, or (ii) eligible to be purchased or guaranteed by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, if certain requirements are met. The proposal sets forth a fourth category of “qualified mortgages” and includes certain loans originated by creditors with assets of $2 billion or less that made 500 or fewer first-lien covered transactions during the previous calendar year. Finally, the proposal also sets forth for comment rules that would allow small creditors operating predominantly in rural or underserved areas to offer first-lien balloon loans with a higher annual percentage rate and still benefit from a conclusive presumption of compliance with the ATR Rule (the “safe harbor”). Comments are due by February 25, 2013, although a final rule related to these proposals is scheduled to become effective on January 10, 2014.

More information is available here.

©2014 Katten Muchin Rosenman LLP

About the Author

Christina J. Grigorian, Banking Attorney, Katten Muchin Law firm
Special Counsel

Christina J. Grigorian counsels clients in all matters related to banks, bank holding companies, and state and foreign-licensed consumer and commercial lenders. Ms. Grigorian provides advice to the firm’s financial institution clients concerning structural and operational issues, including legislative developments impacting such operations, and has worked with companies and individuals in the establishment of de novo entities, including national banks, federal savings banks and state-chartered institutions, as well as state-licensed lenders. She has also counseled clients with...


Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.