By the Division of Banks
Industry Letter on New Rules Addressing Qualified Mortgages and Borrower’s Ability to Repay
December 23, 2013
To the Chief Executive Officer of the Institution Addressed:
The Consumer Financial Protection Bureau’s (Bureau) final rules on the Ability to Repay (ATR) and Qualified Mortgages (QM) under the Truth in Lending Act’s implementing regulation, Regulation Z will become effective for applications taken on or after January 10, 2014. The purpose of this Industry Letter is to remind institutions of their responsibility to comply with the new requirements and to outline the Division of Banks’ (Division) expectations.
The ATR rule describes the minimum standards an institution must use to determine that an applicant has the ability to repay a mortgage loan. Entities must determine an applicant’s ATR on virtually all closed-end mortgage loans originated. The rule also contains special requirements for creditors that are refinancing their own customers into affordable loans to help avoid payment shock. To determine an applicant’s ATR, an institution must consider eight specific underwriting factors. While these eight factors must be included in an institution’s ATR assessment, additional factors may be considered. Institutions must also look to reliable third-party records to verify the information they use to evaluate the underwriting factors.
All QMs are considered to be compliant with the ATR rule. To be considered a QM, loans must meet certain mandatory product feature requirements. These mandatory product feature requirements include: points and fees which are less than or equal to 3% of the loan amount (higher thresholds are provided for loan amounts of $100,000 or less); a maximum loan term less than or equal to 30 years; and the loan cannot contain any risky features such as negative amortization or interest-only payments. However, there is a balloon payment exemption for certain portfolio loans by small creditors. For more information on the balloon payment exemption please refer to the Small Entity Compliance Guide. A loan which meets the mandatory product features can be a QM under any of the three main categories described below:
General definition QM:
A loan which meets the ATR and mandatory product feature requirements noted above with a total monthly debt-to-income ratio of 43% or less.
“GSE-eligible” QM a/k/a Temporary Alternative QM definition
A loan which meets the ATR and mandatory product feature requirements and is eligible for purchase, guarantee, or insurance by Fannie Mae or Freddie Mac (government sponsored enterprises (GSE)), Federal Housing Administration, Veterans Affairs, or U.S. Department of Agriculture is deemed a QM, regardless of whether or not it is sold. To meet the “GSE-eligible” definition a loan must be underwritten pursuant to the required program guidelines, including any relevant debt-to-income requirements. This temporary category expires for loans eligible for purchase or guarantee by the GSEs on the date the Federal Housing Finance Agency’s conservatorship ends, or on January 10, 2021, whichever occurs first. For federal agency loans, this category will expire when the federal agency’s own QM rule takes effect, or on January 10, 2021, whichever occurs first.
Small Creditor Portfolio QM
An institution qualifies under the small creditor portfolio QM category if it has less than $2 billion in assets and originates (with affiliates) 500 or fewer first mortgage loans per year. The loans made by the institution and held in its portfolio are QMs as long as the institution has met the ATR and mandatory product feature requirements, and considered and verified a borrower’s debt-to-income ratio. However, the rule does not set a specific threshold for the debt-to-income ratio. Small creditor QMs generally lose their QM status if they are sold or transferred less than three years after consummation.
It is important to note that an institution may originate a loan even if it is not a qualified mortgage. However, the ATR requirement is still applicable. The Division will not subject a residential mortgage loan to unwarranted regulatory criticism based solely on the loan's status as a non-QM. Nevertheless, the Division will review non-QM loans to ensure that they are prudently underwritten.
The Division understands that many institutions are preparing for the numerous regulatory changes which will affect the mortgage industry in January 2014. During the initial transition period, the Division will use a measured approach to review an institution’s compliance with these regulations. The Division will initially ensure that an institution’s policies, procedures, and staffing are adequate.
For additional information visit the Bureau’s website or refer to the Basic guide for lenders linked below.
David J. Cotney
Commissioner of Banks