The ability to repay rule (ATR) is part of Regulation Z – Truth in Lending Act (TILA). The Consumer Financial Protection Bureau (CFPB) issued a final rule about ATR in January 2013, and the rule became effective in January 2014. The basis of the ATR is the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and it generally requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling and establishes certain protections from liability under this requirement for “qualified mortgages” (See Alphabet Soup for a further explanation of “Qualified Mortgage”). The rule requires creditors to keep a record of their compliance for a period of three years after a loan is closed.
Transactions that are not covered by the ATR include an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan (such as a construction or bridge loan). In the same Dodd-Frank Rules, the CFPB set limits on prepayment penalties.
8 Underwriting Factors – Under the ATR there are eight underwriting factors that must be considered to meet the requirements of the rule. Creditors may also consider other factors, but, should show certain evidence that the eight specified factors have been addressed. The eight factors include the following:
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) Projected 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.
4) Projected 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.