|Organization:||Division of Banks|
|Referenced Sources:||Truth in Lending Act|
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.1 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: