1. Overview of the CFPB’s Ability-to-Repay/ Qualified Mortgage Rule
2013 LBA Bank Counsel Conference December 13, 2013
Overview of the CFPB’s Ability-to-Repay/
Qualified Mortgage Rule
Observations and Considerations for the Louisiana Banker

2. What is the general Ability-to-Repay (ATR) standard?
The ATR rule requires creditors to make a reasonable and good-faith determination before consummating a loan that the consumer has a reasonable ability to repay the loan. See 12 CFR (c)
The rule is effective for loan applications received for covered transactions on or after January 10, 2014.

3. What transactions are covered?
The rule applies to closed-end consumer credit transactions secured by a dwelling including any real property attached to the dwelling. This means loans made to consumers and secured by residential structures that contain one to four units.
The rule is not limited to first liens or to loans on primary residences.
See 12 CFR (a)

4. What transactions are exempt?
Open-end credit plans (HELOCs)
Time-share plans
Reverse mortgages
Temporary or bridge loans with terms of 12 months or less
A construction phase of 12 months or less of a construction-to-permanent loan
Consumer credit transactions secured by vacant land
See 12 CFR (a)

5. What creditors are exempt ?
Community Development Financial Institutions and creditors designated by HUD as a Community Housing Development Organization or a Downpayment Assistance Provider of Secondary Financing
Creditors designated as 501(c)(3) nonprofit organizations that provide credit only to low-to-moderate income consumers
Housing finance agencies extending credit directly to consumers, or by other creditors pursuant to a housing finance agency program
Extensions of credit made pursuant to an Emergency Economic Stabilization Act program
A consumer who obtained a loan that was exempt from the ATR requirements would have no ability-to-repay claim under the ATR/QM rule.
See 12 CFR (a)(3)(iv)-(vi)

6. 8 ATR Underwriting Factors
Current or reasonably expected income or assets that the consumer will rely on to repay the loan
Current employment status (if relying on employment income when assessing ATR)
Monthly mortgage payment for this loan
Monthly payment on any simultaneous loans secured by the same property
Monthly payments for property taxes and insurance and certain other costs related to the property
Debts, alimony, and child-support obligations
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. The general ATR standard does not contain a specific DTI threshold.
Credit history
See 12 CFR (c)(2)

7. Information Verification
Your organization must verify income and asset information you rely on using reasonably reliable third-party records.
No stated income loans: You cannot rely on what consumers orally tell you about their income but must verify a consumer’s income using documents such as W-2s, payroll statements, tax returns, bank statements, etc.
Document! Document! Document!
See 12 CFR (c)(3)

8. How to calculate Debt-to-Income
On the income side of the DTI ratio include earned income (wages or salary); unearned income (interest and dividends); and other regular payments to the consumer such as alimony, child support, or government benefits.
On the debt side include the consumer’s total monthly payments for:
The loan you are underwriting;
Any simultaneous loans secured by the same property;
Mortgage-related obligations – property taxes; insurance required by the creditor; fees owed to a homeowners association; etc.; and
Current debt obligations (student loans, auto loans, existing mortgages etc.), alimony, and child support.
See Appendix Q for details on evaluating income and debts.

9. Calculating loan payments for ATR standard
General rule: if interest rate on the loan can vary during the term of the loan (i.e. ARM) , use the greater of the fully-indexed rate or the introductory rate to calculate the consumer’s monthly payment for the new loan. This is not the rule for Qualified Mortgage (QM) loans.
You must base your calculations on substantially equal monthly payments (no two payments should vary by more than 1 percent) that would fully amortize the loan.
See 12 CFR (c)(5)

10. Special ATR Underwriting Criteria
For higher-priced balloon loans that do not meet the requirements of a balloon-payment QM, you will need to underwrite the loan by considering the maximum payment in the payment schedule, including any balloon payment. YIKES!!!
For non-higher-priced balloon loans: Use the maximum payment scheduled during the first 5 years after the first regular periodic payment comes due. If balloon loan term is not more than 5 years you will have to consider balloon payment. YIKES!!!
Higher-priced loans have an APR that, as of the date the interest rate is set, exceeds the Average Prime Offer Rate (APOR) by 1.5 percentage points or more for first-lien loans and 3.5 percentage points or more for subordinate-lien loans.
See 12CFR (c)(5)

11. ATR rule does not prohibit loan features or transaction types…but
Certain loan features like interest-only or negative-amortization loans made by all creditors, and balloon loans made by non “small creditors”, are not eligible for QM status.
Not having QM status availability for certain loan features strongly discourages the making of loans with such features due to increased potential liability for the creditor.

12. Was your ATR Determination Reasonable?
Factors that may show that your ATR determination was reasonable and in good faith:
Your underwriting standards have historically resulted in comparatively low rates of delinquency and default during adverse economic conditions.
The consumer paid on time for a significant time after origination or reset of an ARM.
Factors that may show that your ATR determination was not reasonable and in good faith:
You ignored evidence that your underwriting standards are not effective at determining consumers’ repayment ability.
You applied underwriting standards inconsistently or used underwriting standards different from those you used for similar loans without reasonable justification.
Payment history: The consumer defaults early in the loan, or shortly after the loan resets, without experiencing a significant financial challenge or life-altering event.

13. Important to Keep in Mind
Whether or not you complied with the ATR requirement is based solely on the information available to you at or before consummation of the loan.
Therefore, unexpected events occurring after consummation should not be used by a court to make a determination that a creditor did not comply with the ATR requirement.

14. Potential liability for violating the ATR standard
If the consumer is successful in proving in court that the lender failed to make a reasonable, good-faith determination of their ATR, lender could be liable for:
3 years of finance charges and fees the consumer paid (unless creditor demonstrates that their failure was not material); and
The consumers’ legal fees (court costs and attorney fees).
Actual damages and statutory damages per TILA
3 year statute of limitations on ATR claims brought as affirmative cases.
After 3 years, consumers can bring ATR claims only as setoff/recoupment claims in a defense to foreclosure.
See Section 130 of the Truth-in-Lending Act (15 U.S.C. 1640)

15. What is a Qualified Mortgage?
A mortgage with characteristics that give it a presumption of compliance with the Ability-to-Repay (ATR) rule.

16. 5 Types of Qualified Mortgages
General QM
Agency/GSE QM (temporary)
Balloon-Payment QM
Small Creditor QM
Temporary Balloon Payment QM
See 12 CFR (e) and (f)

18. QM Criteria
All types of QMs prohibit negative amortization and interest-only periods and loan terms longer than 30 years. In addition, points and fees for all QMs generally may not exceed 3 percent of the total loan amount, but higher thresholds are provided for loans below $100,000.
Generally must consider and verify the consumer’s income or assets, and debts, alimony, and child support. Exception is GSE QM where the GSE or agency requirements apply.
Small Creditor and Balloon-Payment QMs (including Temporary Balloon QM), can only be originated by small creditors.

19. Safe Harbor vs. Rebuttable Presumption
QMs that are not higher-priced have a safe harbor, meaning that they are conclusively presumed to comply with the ATR requirements when you originated the mortgage.
QMs that are higher-priced have a rebuttable presumption that they comply with the ATR requirements. To rebut the presumption a consumer must show that based on the information available at the time the mortgage was made, the consumer did not have enough residual income left to meet living expenses after paying their mortgage and other debts.
See CFR (e)(1)

20. Determining “higher-priced” for purposes of safe harbor
General and Agency/GSE QMs are considered higher-priced if they have an APR that exceeds the APOR by 1.5 percentage points or more for first-lien loans and 3.5 percentage points or more for subordinate-lien loans.
Small Creditor and Balloon-Payment QMs are considered higher-priced if they have an APR that exceeds the APOR by 3.5 percentage points or more for both first-lien and subordinate-lien loans. APOR is published weekly at

21. General QM
General QM loans can be made by all size creditors but may not have negative-amortization, interest-only, or balloon-payment features or terms that exceed 30 years.
Creditor must underwrite the loan based on a fully-amortizing schedule using the maximum rate permitted during the first five years after the date of the first periodic payment
Creditor must determine that the consumer’s total monthly debt-to-income ratio is no more than 43 percent.

22. Agency/GSE QM (Temporary)
This is a temporary provision that extends QM status to certain loans if they are eligible for purchase or guarantee by a Government Sponsored Enterprise (GSE) or for insurance or guarantee by certain federal agencies.
The measure is designed to give the agencies time to exercise separate authority under the Dodd-Frank Act to determine which of their loans will receive QM status.
This provision expires on the date that the GSEs exit federal conservatorship or receivership or on the date the relevant insuring or guaranteeing agency’s own QM rules take effect. At the latest, these provisions shall expire on January 10, 2021.
Loans falling under the Agency/GSE QM definition must meet the same requirements as General QM loans regarding prohibitions on risky features (negative-amortization, interest-only, and balloon-payment features), a maximum loan term of 30 years, and points-and-fees restrictions.

23. Special QMs for “Small Creditors”
You are a small creditor if:
You had assets below $2 billion (to be adjusted annually for inflation by the Bureau) at the end of the last calendar year.
You and your affiliates together originated no more than 500 first-lien, closed-end residential mortgages that are subject to the ATR requirements in the preceding calendar year.

24. Small Creditor QM
Small Creditor QM loans can only be made by small creditors. Loans must not have negative-amortization, interest-only, or balloon-payment features or terms that exceed 30 years.
Creditor must underwrite the loan based on a fully-amortizing schedule using the maximum rate permitted during the first five years after the date of the first periodic payment.
Creditor must consider the consumer’s debt-to-income ratio (DTI), but no specific threshold for DTI.

25. Balloon Payment QM
Balloon-Payment QMs can only be made by small creditors that operate predominantly (more than half of your first-lien covered transactions in any of the three preceding calendar years) in “rural or underserved” areas. Loans must not have negative-amortization or interest-only features.
The loan must have a fixed interest rate and periodic payments (other than the balloon payment) that would fully amortize the loan over 30 years or less.
The loan must have a term of five years or longer.
Creditor must determine that the consumer will be able to make the scheduled periodic payments (including mortgage-related obligations) other than the balloon payment.
Creditor must consider the consumer’s DTI but no specific threshold for DTI or residual income.

26. “Rural or Underserved” Area Defined
A “rural” area is defined by the USDA’s Economic Research Service Urban Influence Codes 4, 6, 7, 8, 9, 10, 11, or 12. Under this definition, parishes excluded from the definition of “rural” are those in metropolitan statistical areas or micropolitan statistical areas adjacent to a metropolitan statistical area.
An “underserved” area is a parish where no more than 2 creditors extend 5 or more first-lien covered transactions in a calendar year.
Currently, there are 22 parishes that are considered “rural or underserved” in Louisiana.
See 12 CFR (b)(2)(iv)

27. Rural or Underserved Parishes

28. Temporary Small Creditor Balloon-Payment QM
The Bureau is providing a two-year (January 10, 2014 – January 10, 2016) transition period during which all small creditors can make Balloon-Payment QMs, regardless of where the small creditor operates. Remember, loans must have a term of 5 years or more.
Temporary Small Creditor Balloon-Payment QMs that are originated during this two-year period will retain their QM status after January 10, 2016, assuming all requirements are met.

29. Additional Requirements
For loans by “small creditors” to qualify for the Small Creditor QM, Balloon Loan QM, or Temporary Balloon Loan QM:
The loan must not be subject to a forward commitment other than to a creditor that itself is eligible to make Small Creditor QMs.
Generally must not sell or otherwise transfer the loan for at least 3 years after consummation, although there are exceptions.

31. Practical Implications
If you are not a small creditor you cannot get QM status on balloon loans (not even rebuttable presumption).
If you are not a small creditor and you make higher-priced (1.5% or more above APOR for first-liens; 3.5% or more for second-liens) balloon loans, you must consider the balloon payment in underwriting to satisfy the ATR standard.

32. Practical Implications (continued)
If you are not a small creditor, even if you make non-higher priced balloon loans, you must consider the balloon payment in underwriting to satisfy the ATR standard if the term of the loan is 5 years or less.
If you are not a small creditor and make ARM loans, you must underwrite using 43% DTI in order to get QM status.

33. Significance of “Small Creditor” - Examples
Scenario 1: Bank under $2 billion in assets makes 500 loans per year and follows all requirements of Balloon-Payment QM category. RESULT: Bank gets Safe Harbor QM for all balloon loans that are non higher-priced (interest rate less than 3.5% above APOR).
Scenario 2: Bank under $2 billion in assets makes 501 loans per year and follows all requirements of Balloon-Payment QM category. RESULT: Bank gets no QM on balloon loans, not even for first 500 loans.

34. Examples Continued
Scenario 1: Bank under $2 billion in assets makes 500 loans per year and follows all requirements of Small Creditor QM category for ARM loans made. RESULT: Bank is not subject to 43% DTI requirement and gets Safe Harbor QM for all ARM loans with interest rate of less than 3.5% above APOR.
Scenario 2: Bank under $2 billion in assets makes 501 loans per year and follows all requirements of Small Creditor QM category for ARM loans made. RESULT: Bank is subject to 43% DTI requirement and only gets Safe Harbor QM for all ARM loans with interest rate of less than 1.5% above APOR.

35. ATR rule does not prohibit loan features or transaction types…but
Certain loan features like interest-only or negative-amortization loans made by all creditors, and balloon loans made by non “small creditors”, are not eligible for QM status.
Not having QM status availability for certain loan features strongly discourages the making of loans with such features due to increased potential liability for the creditor.

36. “Refinance” vs. “Modification”
After January 10, 2014, a refinance of a residential loan will be subject to the ATR/QM rule, but a modification of an existing loan (one made before January 10) will not.
At times, the distinction between a refinance and a modification can be blurry. See 12 CFR (a).
However, if changes to the loan terms are less favorable to the customer, it is a good bet that it will be considered a “refinance”.

37. Possibility for Changes
Numerous bills introduced in Congress that would alter QM rule in a favorable way.
CFPB appears open to changing “rural or underserved” definition for purposes of the Balloon Loan QM. Such a change could help with escrow provisions as well.
CFPB has heard much concern regarding the 500 loan limit to be “small creditor”.

38. What if you don’t qualify for making QM balloon loans?
Available Options:
Don’t make mortgage loans.
Make non-QM mortgage loans.
Make ARM loans instead of balloon loans (ARMS are eligible for Safe Harbor QM status regardless of location or size of the creditor).
Become certified as a Community Development Financial Institution (CDFI), if you qualify.

39. CDFI…What is it?
A Community Development Financial Institution is a certification by the U.S. Treasury for specialized financial institutions that work in market niches that are underserved by traditional financial institutions.
CDFIs include banks, credit unions, and non-depository institutions such as loan and venture capital funds.
A consumer who obtains a covered loan from a CDFI would have no ability-to-repay claim against the CDFI under the ATR/QM rule.

40. CDFI Requirements
Must have a primary mission of promoting community development and serve one or more target markets. The most common way to fulfill these requirements is by having 60% of the banks financial activities (loans and deposits) in qualified CDFI Program Investment Areas.
Investment areas qualify by low income, high unemployment or high poverty rates.
Qualified investment areas can be by census tract, parish, or even state. Very flexible!

41. Pros of Becoming a CDFI
Makes bank eligible to apply for New Markets Tax Credits.
Increases bank’s odds of receiving Bank Enterprise Award (BEA) Program grants.
We are told it can benefit CRA rating.
Exempts bank from ATR/QM rule.

42. Cons of Becoming a CDFI
Extensive documentation required during application and recertification.
Upfront costs for application/certification ($5-10k) if you hire an attorney.
Recertification required every three years and ongoing efforts to ensure compliance.
What if rules are changed?

44. Rural or Underserved Parishes

45. CFPB Resources
questions to

46. Contact me at gendron@lba.org or (225) 214-4837
Questions?
Contact me at or (225)

47. Thank You!
This presentation and my comments do not constitute legal advice. Please seek the advice of counsel.