Are there any exemptions from atr rule
Are There Any Exemptions from ATR Rule?
The primary and most significant exemptions from the ATR rule (Ability-to-Repay) applies to loans structured for business purposes rather than consumer residential use.
The Primary Exemption: Business Purpose Loans (DSCR)
Loans that are definitively categorized as being for business purposes are generally exempt from ATR compliance.
The most prominent example of this exemption in Non-Qualified Mortgage (Non-QM) lending is the Debt Service Coverage Ratio (DSCR) program (also referred to as the Investor Cash Flow product).
A. Rationale for Exemption
- Business Nature: DSCR loans are used for investment properties only. They are deemed business purpose loans and, as such, are exempt from the ATR, Qualified Mortgage (QM), and Higher-Priced Mortgage Loan (HPML) requirements.
- Property-Based Qualification: Qualification for DSCR products is determined solely based on the debt service coverage ratio (DSCR) of the subject property, which is calculated using the property’s rental income relative to its mortgage obligations (PITIA).
- No Personal Income Verification: Because these loans are classified as business purpose, the ATR requirement for assessing the borrower’s personal capacity is waived. For DSCR products:
- No personal income or employment is verified.
- No Debt-to-Income (DTI) ratio is developed.
- The loan documents themselves often require an affidavit stating the loan is for a business purpose and secured by non-owner-occupied real property, noting that the loan may not be subject to the requirements of certain federal consumer protection laws, including the Truth-in-Lending Act (TILA) and its implementing Regulation Z (which governs ATR).
B. Restrictions on Exempt Loans
To maintain the ATR exemption, these loans must strictly adhere to the business purpose definition:
- Investment Only: DSCR loans are for buy and hold rental properties only and cannot be used for a primary residence or to fix and flip a home.
- No Occupancy: The property owner cannot reside in the property.
- Foreign National Exemption: Some programs, like the Horizon Foreign National product, utilize a DSCR calculation to qualify in lieu of documenting borrower income, indicating that the use of DSCR provides a path for Foreign National borrowers who may otherwise face ATR/QM restrictions.
ATR Application to All Other Consumer Loans
It is crucial to note that the ATR rule generally applies to all other covered Non-QM loans, even those utilizing flexible underwriting methods.
- The Dodd-Frank Act imposed the obligation on us to make a good-faith effort to determine that the applicants have the ability to repay the mortgage. ATR compliance must be fully documented for all loans subject to Regulation Z.
- Full Doc and Alt Doc Loans: Non-QM loans under the Full Doc, Alt Doc (Bank Statement), and Asset Depletion programs explicitly require an Ability-to-Repay (ATR) assessment.
Specific Internal Waivers (Not Full ATR Exemptions)
While not a complete exemption from the ATR rule, certain non-DSCR programs modify or eliminate specific ATR requirements based on the unique nature of the borrower’s documentation:
- DTI Exemption for Asset Qualifier: For the Asset Qualifier product (which relies on liquid assets to prove repayment ability for primary residences), no DTI is developed. This means the underwriter is exempted from calculating the Debt-to-Income ratio (one of the eight ATR factors). However, the program requires a minimum residual income calculation, demonstrating that the borrower must still prove repayment capacity through wealth or cash flow, thereby adhering to the spirit of the ATR rule.
- Tax Transcript Exemption: Loans utilizing alternative documentation, such as the Bank Statement or DSCR programs, are generally not required to provide IRS tax transcripts. This exemption relieves us from the burden of verifying taxable income when calculating qualifying income through other methods (like bank deposits).
FAQ's
A lender may issue a non-QM loan without following the CFPB’s “ability-to-repay” rule, which involves examining the eight components of a borrower’s finances.
All loans that are subject to Regulation Z must comply with the Ability-to-Repay (ATR) rule provisions in the Truth in Lending Act.
No DTI is developed for the Asset Qualifier product, although this program still requires a residual income calculation to show repayment ability.
No. If a loan is an HPML, compliance with ATR must be fully documented, and escrows for taxes and insurance are mandatory for a minimum of five years.
No. An Ability-to-Repay (ATR) assessment is required for all loans in the Non-QM product series that are consumer loans, including Full Doc, Alt Doc, and Asset Depletion options.
A Business Purpose & Occupancy Affidavit is typically required, noting that the loan may not be subject to the requirements of the federal Truth-in-Lending Act (TILA) and its implementing Regulation Z (ATR).
No personal income or employment is required to be verified, and no Debt-to-Income (DTI) ratio is developed for Investor Cash Flow (DSCR) products.
The Investor DSCR (Debt Service Coverage Ratio) program is designed to be a business purpose loan and is exempt from the ATR, QM, and HPML requirements.
The loan must be secured by non-owner-occupied real property, and the borrower cannot reside in the property.
Loans that are deemed business purpose loans are generally exempt from the ATR requirement.
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