Today's Trends in Credit Regulation

CFPB Issues Final Rule for Ability-to-Repay and Qualified Mortgage Standards
By Peter L. Cockrell

The CFPB continues its roll out of rules that impose explicit federal underwriting standards on the national mortgage market and the actual effects of these new standards remain unclear. In the final rule there is something of a compromise that perhaps leaves neither consumer advocates nor the mortgage industry entirely happy, but as they say, it could have been worse.

On January 10th, the CFPB published the eagerly awaited final rule for its Ability-to-Repay and Qualified Mortgage standards. The concept of requiring mortgage lenders to assess a borrower’s ability to repay is not new and the final rule essentially expands upon the high-priced mortgage loan rules promulgated by the Federal Reserve Board in 2008.

The CFPB’s final rule requires mortgage lenders to make a reasonable and good faith determination based on certain verified and documented information that the borrower has a reasonable ability to repay the loan according to its terms. The final rule also provides that a lender will be presumed to have complied with the ATR requirements if the lender originates loans that are “qualified mortgages,” as defined by the rule.

In making a reasonable determination of a borrower’s ability to repay, the lender must, at a minimum, verify the following eight underwriting factors:

  • Current or reasonably expected income or assets;
  • Current employment status;
  • The monthly payment on the covered transaction;
  • The monthly payment on any simultaneous loan;
  • The monthly payment for mortgage-related obligations;
  • Current debt obligations, alimony, and child support;
  • The monthly debt-to-income ratio or residual income; and
  • Credit history.

The lender also must determine a borrower’s ability to repay the principal and interest of the mortgage over the life of the loan.

While the Dodd-Frank Act provided for a presumption of compliance with the ATR requirements if a qualified mortgage is originated, it did not determine whether the presumption of compliance should be conclusive or rebuttable. This spawned legion comment letters and lobbying efforts to ensure that the qualified mortgage rule would not excessively restrict mortgage lending.

The final rule provides a safe harbor (i.e., the presumption of compliance is conclusive) for loans that satisfy the definition of “qualified mortgage” and are not “high-priced” (as generally defined by the FRB 2008 rule). Higher-priced loans that satisfy the QM definition will receive a rebuttable presumption of compliance with the ATR standards. Borrowers with higher-priced QM mortgages will thus be able to challenge whether their lender complied with the ATR standards by showing that, at the time of origination, their income and debt obligations left them with insufficient assets to meet living expenses.

The QM standard requires certain underwriting criteria be satisfied and excludes from the definition loans with certain terms that received a scarlet letter from consumer advocates following the crash. Generally, the standard excludes loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. A QM generally cannot have fees and points exceeding 3% of the total loan amount, although certain “bona fide discount points” are permissible for prime loans. To qualify as a QM, the general rule further requires that a borrower’s monthly payments be calculated based on the highest payment applicable in the first five years of the loan. The final rule also drew a line in the sand, requiring a debt-to-income ratio that is less than or equal to 43%. Buried in the appendices of the final rule are detailed procedures for how lenders are supposed to make this calculation.

Lenders can applaud one aspect of the final rule that made it less restrictive, which is that more loans will qualify as QM’s than many in the industry had been expecting. At a conference announcing the final rule’s publication, CFPB Director Richard Cordray stated the obvious: “We can draw up the greatest consumer protections ever devised, but if consumers cannot get credit, then there is nothing to protect.” Tacitly acknowledging that the QM rule will have pervasive and as-yet-undetermined effects on the mortgage market, the final rule also created a temporary category of QM’s with broader underwriting requirements than the standard definition. Loans will qualify as QM’s if they satisfy the general QM prerequisites and also satisfy the underwriting requirements of Fannie Mae, Freddie Mac, the Federal Housing Administration, the Veterans Affairs Department, the Department of Agriculture or the Rural Housing Service.

Along with the final rule, the CFPB also issued another rule proposal. This proposal seeks comment on whether certain entities should be exempt from the ATR requirement because they are subject to their own particular underwriting criteria. These entities would include designated non-profit lenders, homeownership stabilization programs, and certain federal agency and GSE refinancing programs.

The final rule will go into effect January 10, 2014 as the regulatory onslaught continues for the mortgage industry. The CFPB’s simplified mortgage disclosure form rules are still due out this summer, but there is as yet no timetable for the rules governing appraisals and loan officer compensation.

Peter L. Cockrell is an associate of Hudson Cook, LLP, in the firm’s Hanover, Maryland office. Peter can be reached at 410-865-5418 or by email at

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