What is the atr rule
What is the ATR Rule? The ATR rule (Ability-To-Repay) is a fundamental regulatory requirement in mortgage lending, designed to ensure that we make safe and sustainable loans to consumers.
Definition and Origin of the ATR Rule
The ATR rule, or Ability-to-Repay rule, is currently known as the requirement imposed on us to make a good-faith effort to determine that the applicants have the ability to repay the mortgage.
Key Regulatory Framework:
- Dodd-Frank Act: The obligation on us to assess the applicant’s ability to repay the mortgage was imposed by the Dodd-Frank Act.
- CFPB Regulation Z: All covered loans must be designated as ATR compliant and must adhere to the standards set forth in the Consumer Financial Protection Bureau’s (CFPB) Regulation Z, specifically Section 1026.43(c).
- Truth in Lending Act (TILA): Compliance requires adherence to the ATR rule provisions outlined in the Truth in Lending Act.
Minimum Underwriting Considerations (The Eight Factors)
For loans that utilize the General ATR Option, we must verify and underwrite based on eight minimum considerations. These standards are used to confirm that the loan meets ATR requirements as defined in 12 CFR 1026.43.
The eight minimum Underwriting Factors are:
- Income or Assets: The consumer’s current or reasonably expected income or assets, excluding the value of the dwelling that secures the loan.
- Employment Status: The consumer’s current employment status, if the creditor relies on income from the consumer’s employment to determine repayment ability.
- Monthly Payment (Covered Transaction): The consumer’s monthly payment on the covered mortgage transaction, calculated in accordance with the guidelines.
- Monthly Payment (Simultaneous Loan): The consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made.
- Mortgage-Related Obligations: The consumer’s monthly payment for mortgage-related obligations.
- Current Debt Obligations: The consumer’s current debt obligations, alimony, and child support.
- Debt-to-Income (DTI) or Residual Income: The consumer’s monthly debt-to-income ratio or residual income, determined in accordance with the guidelines.
- Credit History: The consumer’s credit history.
Applicability in Non-QM Lending
The ATR rule is highly relevant in the Non-Qualified Mortgage (Non-QM) space, as these loans are explicitly structured outside of the stricter Qualified Mortgage (QM) standards, making adherence to the foundational ATR requirements crucial.
General Compliance:
- For several Non-QM product lines, such as the Non-QM Advantage series, an Ability-to-Repay (ATR) assessment is required for all loans.
- Loans structured under the Bank Statement program (a type of Non-QM loan) must typically meet and document the eight ATR rules.
Exemptions (Business Purpose Loans):
Certain loan types are typically exempt from ATR requirements because they are structured for business purposes rather than consumer residential use.
- Loans that are deemed business purpose loans are often exempt from ATR, QM, and High-Priced Mortgage Loan (HPML) requirements.
- The Debt Service Coverage Ratio (DSCR) program for investment properties is typically structured as a business purpose loan and is therefore exempt from ATR rule.
- For DSCR loans, qualification is based solely on the property’s debt service coverage ratio (DSCR) rather than documenting the borrower’s personal income.
ATR and HPML Loans:
If a loan is classified as a Higher-Priced Mortgage Loan (HPML), it is subject to additional ATR compliance mandates. HPMLs must fully document compliance with ATR and require mandatory escrows for taxes and insurance for a minimum of five years.
FAQ's
Yes. ATR assessment is required for Alt Doc (Alternative Documentation) loan programs, which include Bank Statement loans and Asset Utilization/Depletion.
Loans deemed business purpose loans are generally exempt from the ATR requirement.
An Ability-to-Repay (ATR) assessment is required for all Non-QM loans, including Full Doc, Alt Doc, and DSCR qualification options.
The ATR assessment also includes evaluating the consumer’s credit history.
Two of the eight minimum ATR considerations include the consumer’s current or reasonably expected income or assets and their current employment status (if employment income is used).
The General ATR Option consists of eight minimum underwriting considerations.
Loans subject to the ATR rule must comply with the provisions outlined in the Truth in Lending Act and adhere to the standards set forth in the CFPB’s Regulation Z, Section 1026.43(c).
The obligation for lenders to assess the applicant’s ability to repay the mortgage was imposed by the Dodd-Frank Act.
The ATR rule is the requirement imposed on lenders to make a good-faith effort to determine that the applicants have the ability to repay the mortgage.
ATR stands for Ability-to-Repay.
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