How do underwriters meet atr requirements
The ATR requirements (Ability-to-Repay) rule forms the essential regulatory backbone of mortgage lending, requiring us to diligently confirm that a borrower has the financial capacity to meet the loan obligations. Underwriters play a crucial role in documenting and verifying this capacity, particularly within the Non-Qualified Mortgage (Non-QM) space, where flexible documentation is common, yet ATR compliance is mandatory for most covered loans.
Foundational ATR Requirements for Underwriters
The ATR rule mandates that we make a good-faith effort to determine that the applicants have the ability to repay the mortgage. All covered loans must adhere to the standards set forth in the CFPB’s Regulation Z, Section 1026.43(c), and comply with the ATR provisions of the Truth in Lending Act (TILA).
Underwriters meet this mandate by performing a comprehensive evaluation of the borrower’s financial position, which typically relies on the “four C’s of Credit”: Cash/liquidity, Capacity/ability to manage the debt, Credit/history of repayment, and Collateral/property being secured.The eight minimum underwriting considerations are:
A. The Eight Minimum Underwriting Considerations
For loans utilizing the General ATR Option, underwriters must verify and document eight minimum considerations to confirm repayment ability. These considerations are designed to assess the borrower’s capacity and overall creditworthiness:
- Income or Assets: The consumer’s current or reasonably expected income or assets (excluding the value of the dwelling itself).
- Employment Status: The consumer’s current employment status, if employment income is relied upon.
- Monthly Payment on the Covered Transaction.
- Monthly Payment on any Simultaneous Loan known or reasonably expected by the creditor.
- Monthly Payment for Mortgage-Related Obligations (like property taxes and insurance).
- Current Debt Obligations: This includes alimony and child support.
- Debt-to-Income (DTI) Ratio or Residual Income.
- Credit History.
Meeting ATR through Income and Capacity Documentation
The primary way underwriters meet the ATR rule is by rigorously verifying the borrower’s income and capacity, even when traditional documentation is unavailable.
A. Verifying Income for Full Documentation (Full Doc) Loans
For standard Full Doc loans, underwriters must obtain and confirm stability and continuance of income:
- Wage Earners: Income must be verified with documentation like 30 days of paystubs reflecting year-to-date earnings, one or two years of W-2s, W-2 transcripts, and a Verbal Verification of Employment (VVOE) completed close to the note date (e.g., within 10 days of the Note date). A fully executed and signed IRS Form 4506-C is typically required on full doc transactions.
- Self-Employed Borrowers (Full Doc): Underwriters establish the borrower’s earnings trend, usually over the previous two years, using signed individual tax returns, business tax returns (if applicable), and a Year-to-Date (YTD) Profit and Loss (P&L) statement and balance sheet. If the earnings trend is declining or shows unusual fluctuation, the lesser income should be used, and a written explanation (LOE) may be required from the borrower to justify the income’s continuance.
B. Meeting ATR Using Alternative Documentation (Alt Doc)
For Non-QM products designed for self-employed or asset-rich borrowers, ATR is met by substituting traditional documentation (W-2s, tax returns) with alternative, verifiable methods:
Documentation Method | ATR Compliance Mechanism |
Bank Statement Loans | Underwriters analyze 12 or 24 consecutive months of personal or business bank statements to determine cash flow. Income is calculated by averaging deposits and applying an expense ratio (often 50% fixed or determined by a CPA/EA/CTEC). The goal is to establish stable, predictable deposits that reflect the borrower’s self-employment income. |
Asset Utilization / Depletion | For borrowers who are asset-rich and income-light, underwriters calculate an imputed monthly income by dividing the total net liquid assets by a fixed term (often 84 months or 120 months / 10 years). This calculated income is then used in the DTI ratio to confirm the ability to repay. Assets must be liquid (e.g., checking, savings, stocks, vested retirement funds). |
C. Assessing Debt-to-Income (DTI) and Residual Income
The DTI ratio is a crucial metric, reflecting the borrower’s capacity to repay.
- DTI Limits: The maximum DTI for Non-QM loans is generally higher than conventional loans, often set at 50%.
- Residual Income: For non-DSCR loans where the DTI exceeds 43%, residual income requirements often apply (e.g., residual income must meet or exceed a specified dollar amount like $1,500).
- Qualifying Payment Calculation: For loans with Interest-Only (I/O) features, ATR requires the qualifying payment used in the DTI calculation to be based on the fully amortizing principal and interest payment over the remaining amortization term, not just the initial I/O payment.
Meeting ATR through Credit History Verification
Underwriters use credit reports and payment histories to assess the borrower’s willingness to repay.
- Credit Report and Tradelines: A merged credit report from all borrowers is required. Underwriters verify that the borrower meets the minimum trade line requirements (e.g., two open and reporting for 24 months, or three open and reporting for 12 months).
- Mortgage and Rental History: The borrower’s previous housing payment history, typically covering the most recent 12 months, must be verified via the credit report, Verbal Verification of Mortgage (VOM), or Verification of Rent (VOR).
- Adverse Information: Any irregularities, such as derogatory information, disputed accounts, or credit inquiries within the last 90-120 days, must be investigated. The borrower must provide a written explanation (LOE), which the underwriter must review to determine if the explanation is consistent with other information and establishes a credible cause for the adverse event.
ATR Compliance for Exempt Loans (DSCR)
A significant aspect of meeting regulatory compliance is identifying loans that are exempt from the ATR rule. Underwriters often meet ATR standards by classifying specific products, such as Debt Service Coverage Ratio (DSCR) loans, as business purpose loans, which are often exempt from ATR, QM, and HPML requirements.
- DSCR Loans: For these investment properties, the underwriting focus shifts entirely away from the borrower’s personal ATR. Qualification is determined solely based on the debt service coverage ratio (DSCR) of the subject property, typically defined as the gross rents divided by the proposed PITIA.
- No Income/DTI Required: For DSCR products, no personal income or employment is verified, and consequently, no DTI is developed. The underwriter’s job here is to ensure the loan meets the strict criteria for being a business purpose loan (e.g., the property cannot be owner-occupied).
FAQ's
DSCR loans are generally exempt from personal ATR as business purpose loans; affordability is assessed by calculating the Debt Service Coverage Ratio (DSCR) of the subject property only.
The qualifying payment used for DTI must be the fully amortizing principal and interest payment over the remaining term, not just the initial I/O payment.
Lenders must obtain a Verbal Verification of Employment (VVOE), typically within 10 business days prior to the note date.
Underwriters review the borrower’s credit history through a merged credit report.
The imputed monthly income is calculated by dividing the Net Qualifying Assets by a fixed term, often 84 months.
They analyze 12 or 24 consecutive months of bank statements to establish stable deposits and cash flow.
Lenders verify income using documentation, including paystubs and W-2s, and must require the IRS Form 4506-C (tax transcripts) for all borrowers.
Underwriters calculate the consumer’s monthly debt-to-income ratio (DTI) or residual income.
Underwriters must document and verify the eight minimum underwriting considerations defined by the General ATR Option.
Underwriters must make a good-faith effort to determine that the applicants have the ability to repay the mortgage.
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