ATR-QM - Iowa Bankers Association

Articles

FAQs

Coverage

ATR Underwriting Requirements

Record Retention

Balloon Payment QMS and Small Creditor QMS

Points and Fees

General QMs As of Oct. 1, 2022

coverage

Question: What loans are covered by the Ability to Repay (ATR)/Qualified Mortgage (QM) rule?

Answer: The rule applies to almost all originated closed-end, consumer credit transactions secured by a dwelling, including real property attached to the dwelling. The dwelling does not have to be the borrower’s principal residence and the mortgage does not have to be in first lien position. The rule specifically excludes home equity lines of credit (HELOCs), time share plans, reverse mortgages, temporary or bridge loans with a term of 12 months or less, and construction only loans of 12 months or less.

Question: Does the CFPB’s ATR/QM rule apply to loan modifications?

Answer: “Modifications” are only covered if the transaction is deemed a “refinance” under Regulation Z. If a loan modification is not subject to Regulation Z, it will not be subject to the ATR/QM rule. If a modification does meet the definition of “refinance” under Regulation Z, the ATR/QM rule will apply.
Refinances are addressed in Regulation Z at § 1026.20(a) and its accompanying commentary:

(a) Refinancings. A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation.
Official Staff Commentary:
20(a) Refinancings
1. Definition. A refinancing is a new transaction requiring a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties’ contract and applicable law. The refinancing may involve the consolidation of several existing obligations, disbursement of new money to the consumer or on the consumer’s behalf, or the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the prior one.
i. Changes in the terms of an existing obligation, such as the deferral of individual installments, will not constitute a refinancing unless accomplished by the cancellation of that obligation and the substitution of a new obligation.
ii. A substitution of agreements that meets the refinancing definition will require new disclosures, even if the substitution does not substantially alter the prior credit terms.

So if the bank “modifies” the existing loan by having the consumer execute a new note, and replaces the original note with a new note (even if the loan number remains unchanged) a “refinancing” has occurred, triggering new TILA disclosures and the ATR/QM rules. Whereas, if the bank leaves the original note in place and has the customer sign a “modification agreement,” “extension agreement” or “change in terms agreement” to amend the original agreement (but keeping the original agreement in place), the ATR/QM rules are not triggered.

ATR UNDERWRITING REQUIREMENTS

Question: When a property has not been fully assessed for tax purposes, what monthly tax payment amount should be used to determine repayment ability? For example, when property taxes have not been fully assessed on a newly constructed home, what amount should be used when determining repayment ability on the permanent loan?

Answer: Reg. Z states a creditor must include in its repayment ability assessment the consumer’s monthly payment for mortgage-related obligations, such as the expected property taxes. Estimates of the mortgage-related obligations should be based upon information that is known to the creditor at the time the creditor underwrites the mortgage obligation. The bank knows at the time of underwriting what the value of the home will be upon construction completion and should use that value to estimate property taxes based on current tax rates.

Reg. Z requires that the creditor, acting in good faith, must exercise due diligence in obtaining the information necessary to determine the consumer’s repayment ability. For example, the creditor must, at a minimum, utilize generally accepted calculation tools. The creditor may rely on the representations of other parties in obtaining information. For example, the creditor might contact the county assessor’s office for the method they use to calculate this on the value at completion.

As a reminder, this same projected tax amount based on the completed value of the property should be used on the Loan Estimate for the permanent financing. The actual and verified amount due for taxes during the first year of repayment is then used on the Closing Disclosure.

Question: What is meant by “creditors must evidence a borrower’s repayment ability” in the general ATR provisions?

Answer: Banks are required to verify and document a borrower’s repayment ability for all consumer-purpose, mortgage secured loans. In doing the verification, the creditor must verify and document income or assets relied upon to determine repayment ability (including expected income) based on the facts and circumstances known to the creditor as of consummation. (For example, if creditor has knowledge at consummation of reductions in income due to retirement or job loss, this must be considered.)

Acceptable verification of income could include a W-2, tax returns, payroll receipts, other third party documents, award letters, written VOE, etc. Typically it would not be acceptable to use the borrower’s stated income or an oral verification of employment. However, section 1026.43(c)(3)(ii) states a creditor may verify a consumer’s employment status orally if the creditor prepares a record of the information obtained orally. Creditors must also take into consideration and verify the borrower’s current and expected obligations. The final rule states a creditor may rely on debts listed on credit report and must include the new mortgage-related debt including principal, interest, expected property taxes, mortgage insurance (if applicable), home owners association dues, etc. as well as any “piggy-back” second-lien transactions used for down payment or closing costs (if applicable). Similar to the income and asset verification process, a creditor is required to use facts and circumstances known to the creditor as of consummation. Meaning, if a borrower indicates on his/her application they have additional debts not listed on the credit report, the creditor must also take into consideration those debts when calculating a borrower’s repayment ability.

Question: Under the general ATR provisions, does the regulation indicate what is an acceptable debt-to-income level or residual income amount to use when calculating repayment ability?

Answer: No. Each creditor will be responsible for developing its own underwriting criteria and establishing an acceptable DTI threshold. The regulation requires the creditor to consider the consumer’s monthly debt-to-income ratio and also consider the ratio of the consumer’s total monthly debt obligations to the consumer’s total monthly income.

Question: When calculating a borrower’s repayment ability under the general ATR provisions, do we have to use the highest scheduled principal and interest payment in the first seven years?

Answer: No. If the loan was not an HPML, you would use the maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due for the loan. However, for HPML loans, you have to use the maximum payment in the payment schedule including any balloon payment. If the loan is an interest-only loan, you would use the fully indexed rate or any introductory rate (whichever is greater) and substantially equal, monthly payments of principal and interest that will repay the loan amount over the term of the loan remaining as of the date the loan was recast.

Question: I have questions related to the ATR rules related to calculating the borrower’s debt-to-income (DTI) ratio or residual income. The rule indicates we should use “reasonably reliable third party records” to verify the borrower’s income and debts when evaluating their repayment ability and doing our DTI calculation. What if we obtain a credit report to verify the consumer’s monthly obligations and find the credit report does not include a debt the consumer listed on his/her application? Must we somehow further verify this debt? Must we include this debt in our DTI calculation?

Answer: When the consumer’s application lists a debt that is not included on the consumer’s credit report, the creditor is required to include that obligation when assessing the consumer’s DTI or residual income. The rule, however, indicates the creditor is NOT required to independently verify that debt.

Question: Does the ATR rule require that I consider the debt obligations and credit histories of all applicants and guarantors involved with the transaction or if the primary applicant has sufficient income to support the payment, can I just consider his/her income and debts?

Answer: When two or more customers apply as “joint obligors” with primary liability on a loan, the creditor must consider the debt obligations and credit histories of all joint, primary obligors when assessing repayment ability. However, creditors are not required to include the debt obligations or credit history of someone who is merely a guarantor or surety as these parties are not primarily obligated on the loan.

Question: Does the ATR rule ban creditors from making balloon payment loans?

Answer: No, but if you make short term balloon loans, those in which the loan balloons within the first five years, you will need to adjust your product terms.

Under the general ATR rule, a creditor must evidence the borrower’s repayment ability. Creditors may continue to make balloon loans, provided the balloon payment does not occur within the first five years after the first payment date and the loan is priced such that it is not an HPML. When the balloon payment occurs after the 60th payment date and the loan is not an HPML, the creditor is to use the borrower’s highest scheduled payment in the first five years (without consideration of the balloon payment) when calculating the borrower’s repayment ability and debt-to-income ratio. If the balloon loan is an HPML, the creditor must consider the balloon payment in evidencing the borrower’s repayment ability and calculating the borrower’s DTI ratio; which, of course, would disqualify most borrowers from the ability to repay because most would not have sufficient other assets or residual income to make the balloon payment. Balloon loans that satisfy the general ATR requirements meet Reg. Z’s compliance obligation, but do not qualify for the safe harbor or rebuttable presumption of compliance offered by the “qualified mortgage” provisions.

RECORD RETENTION

Question: How long do we have to retain records of compliance with the ATR/QM rule? Can we retain electronic records?

Answer: The rule requires you retain evidence of compliance with the ATR/QM rule for three years after consummation. While you do not have to retain actual paper copies of documentation used in underwriting a transaction, you must be able to reproduce such records accurately. For example, if you use a consumer’s W-2 tax form to verify income, you must be able to reproduce the form itself, not merely the income information contained on the form. Accordingly, you can obtain records transmitted electronically, such as via e-mail or secured external Internet link to access information, if you can retain or otherwise reproduce the records accurately during the three year ATR/QM retention period.

BALLOON PAYMENT QMS AND SMALL CREDITOR QMS

Question: We understand the QM provisions generally prohibits balloon payment loans, other than for small creditors. How is a small creditor defined?

Answer: A small creditor is defined in the ATR/QM rule as a creditor that meets all of these criteria:

During the preceding calendar year, or, if the application for the transaction was received before April 1 of the current calendar year, during either of the two preceding calendar years, the creditor and its affiliates together extended no more than 2,000 covered transactions, secured by first liens, that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person; and
As of the end of the preceding calendar year, the creditor had total assets of less than $2 billion. (Note: this asset threshold shall adjust automatically each year, based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million dollars. See the IBA’s for the most current threshold.)

Question: Do the Ability to Repay (ATR) and Qualified Mortgage (QM) rules ban creditors from making balloon payment loans?

Answer: No, but if you make short term balloon loans, those in which the loan balloons within the first five years, you will need to adjust your product terms.

Also, keep in mind while balloon loans generally do not qualify for QM status, an exemption is provided in the final rule for creditors who serve primarily “rural or underserved” areas and “small creditors.” These qualifying creditors are able to make Balloon Payment Qualified Mortgages (BPQMs). To qualify for the rural-small creditor exemption, the creditor must:

Have made a first-lien covered transactions in the prior calendar year secured by properties located in areas designated as “rural” or “underserved.” The CFPB has published a list of rural or underserved counties and posted it to its website. This list will be updated annually. Currently, 73 of Iowa’s 99 counties are considered “rural.” The list of rural counties can be found on the CFPB website at https://www.consumerfinance.gov/rural-or-underserved-tool/
The organization must have assets below $2 billion (adjusted annually for inflation).
The organization (including affiliates) must have originated no more than 2,000 first-lien covered transactions in the preceding calendar year.

Question: What are the benefits of making Small Creditor QMs and Balloon Payment QMs under the Ability to Repay/Qualified Mortgage rule?

Answer: Both Balloon Payment QMs and Small Creditor QMs can be made by small creditors using their own proprietary underwriting guidelines.

In addition, creditors meeting the criteria for Balloon Payment QMs can make a qualified mortgage with a balloon payment provided the balloon payment does not occur in the first five years of the loan’s repayment, the loan meets the other QM requirements, and the loan is held in the bank’s loan portfolio for at least the first three years. It is important to note however, Small Creditor QMs are not permitted to have a balloon payment.

Question: When determining whether or not we originated 2,000 mortgage loans, should we include loans that we originated and sold to secondary market investors or only in-house portfolio loans in our count?

Answer: Reg. Z section 1026.35(b)(2)(iii)(B) defines a “small creditor” as one that, during either of the two preceding calendar years, together with its affiliates originated 2,000 or fewer first lien “covered transactions” as defined by Reg. Z section 1026.43(b)(1). This includes loans secured by first liens, that were sold, assigned, or otherwise transferred to another person, or that were subject at the time of consummation to a commitment to be acquired by another person. Thus, only include loans that are originated and sold, do not include loans held within your portfolio.

It is also important to note, a “covered transaction” per section 1026.43(b)(1) means a consumer credit transaction that is secured by a dwelling (a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence). Excluded from the definition of “covered transactions” are home equity lines of credit, reverse mortgages, a temporary or “bridge” loan having a term of 12 months or less and the construction phase of 12 months or less of a construction-to-permanent loan.

Question: Please define affiliate. Does this include all banks in a holding company under separate charters?

Answer: “Affiliate” is currently defined at Reg. Z, section 1026.32(b)(2), “any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).” Based on this definition, yes, separate bank charters under common control of a bank holding company are affiliates.

POINTS AND FEES

Question: Are seller paid discount points, such as in interest rate buydown situations, included in the ATR/QM points and fees test?

Answer: Seller paid discount points are NOT included in the definition of “points and fees” and in fact are specifically exempted in the official staff commentary to Reg. Z § 1026.32(b)(1) – #2(iii):

iii. Seller’s points. Seller’s points, as described in § 1026.4(c)(5) and commentary, are excluded from the finance charge and thus are not included in points and fees under § 1026.32(b)(1)(i). However, charges paid by the seller for items listed in § 1026.32(b)(1)(ii) through (vi) are included in points and fees.

Question: I have a question regarding the definition of “points and fees” for purposes of the limitations to points and fees charged in connection with QMs. Are all “finance charges” points and fees? Specifically, I am wondering about the MERs fee, wire transfer fees and the secondary market fees charged to the bank by our investors (such as loan level price adjustments, commitment fees, etc.) that we pass on to our borrowers? All of these fees are “finance charges” per Regulation Z, but I am not sure if they should be included in the “points and fees” total.

Answer: Generally, all “finance charges” are included in the points and fees calculation and the MERs fee, wire fees, VOE fees and investor fees that are passed on to borrowers are finance charges. However, the definition of “points and fees” provides an exclusion for finance charges that are NOT retained by the creditor or an affiliate of the creditor. See the CFPB’s Small Entity Compliance Guide’s explanation:

Finance charge (§ 1026.32(b)(1)(i))
In general, include all items included in the finance charge. (§ 1026.4(a) and (b)). However, you may exclude the following types and amounts of charges, even if they normally would be included in the finance charge:

Bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of either (§ 1026.32(b)(1)(D))
In general, you may exclude these types of charges even if they would be included in the finance charge. For example, you may exclude a bona fide charge imposed by a third-party settlement agent (for example, an attorney), as long as neither the creditor nor the loan originator (or their affiliates) retains a portion of the charge.
However, you must still include any third-party charges that are specifically required to be included under other provisions of the points-and-fees calculation (for example, certain PMI premiums, certain real estate-related charges, and premiums for certain credit insurance and debt cancellation or suspension coverage). Note that up-front fees you charge consumers to recover the costs of loan-level price adjustments imposed by secondary market purchasers of loans, including the GSEs, are not considered bona fide third-party charges and must be included in points and fees.

So provided the MERs, VOE and wire fees are not paid to the creditor, loan originator or affiliate of either, they can be excluded from the points and fees calculation. Secondary market investor fees, however, cannot be excluded from the points and fees calculation. Such fees are actually assessed by the investor to the creditor as part of the secondary market sale. If the creditor elects to pass the cost on the borrower, the fee becomes a fee payable to creditor to recoup its cost in originating and selling the loan, rather than a third party fee. The IBA has developed a to assist bankers on this matter.

Question: Are hazard insurance premiums paid to an affiliate deemed to be “points and fees” under Regulation Z’s definition of “points and fees” for the purposes of the HOEPA rule and Qualified Mortgage rule limitation on “points and fees?”

Answer: Good question! The definition of points and fees generally includes six categories of fees that are deemed to be “points and fees” unless expressly excluded in the definition. The two categories in which hazard insurance premiums may fall under the definition include:

All items included in the finance charge under § 1026.4(a) and (b); and,
All items listed in § 1026.4(c)(7) (other than amounts held for future payment of taxes), unless: (1) The charge is reasonable; (2) The creditor receives no direct or indirect compensation in connection with the charge; and (3) The charge is not paid to an affiliate of the creditor.

Hazard insurance premiums paid at or before consummation to an affiliate generally are not deemed “finance charges” under 1026.4(a) and (b) provided the creditor meets certain criteria: the purchase of insurance from the affiliate is voluntary, that fact is disclosed to the borrower and the cost of initial premium is disclosed. Thus, if the premium is not considered “finance charges,” it is also not considered a “point and fee.”

The definition of “points and fees” also includes section 1026.4(c)(7) fees that are exempt from the definition of “finance charge” but still considered to be “points and fees” if the charge is paid to an affiliate of the creditor or the creditor. Thus, if an amount for insurance is required to be deposited into an escrow account at or before closing and is payable to the creditor or an affiliate of the creditor, it is considered a “point and fee” even though the amount is not considered a finance charge under Regulation Z.

The section 1026.4(a) and (b) finance charge provisions and section 1026.4(c)(7) provisions in the definition of “points and fees” are two separate fee categories and therefore were not inter-dependent on one being a “point and fee” for the other to also be considered a “point and fee.”

Question: I need clarification regarding calculating the “total loan amount” calculation for points and fees purposes. Should we deduct ALL points and fees that are financed by the creditor from the Amount Financed or just some of them?

Answer: The definition of “total loan amount” in Regulation Z is as follows:

The Total Loan Amount for a closed-end credit transaction is calculated by taking the Amount Financed, as determined according to § 1026.18(b), and deducting any cost listed in § 1026.32(b)(1)(iii), (iv), or (vi) that is both included as points and fees under § 1026.32(b)(1) and financed by the creditor.
Not all points and fees are subtracted from the Amount Financed, just those detailed in section (iii), (iv) and (vi) of § 1026.32(b)(1):

(iii) All items listed in § 1026.4(c)(7) (other than amounts held for future payment of taxes), unless:
(A) The charge is reasonable;
(B) The creditor receives no direct or indirect compensation in connection with the charge; and
(C) The charge is not paid to an affiliate of the creditor;
(iv) Premiums or other charges payable at or before consummation for any credit life, credit disability, credit unemployment, or credit property insurance, or any other life, accident, health, or loss-of-income insurance for which the creditor is a beneficiary, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract;
(vi) The total prepayment penalty, as defined in paragraph (b)(6)(i) or (ii) of this section, as applicable, incurred by the consumer if the consumer refinances the existing mortgage loan, or terminates an existing open-end credit plan in connection with obtaining a new mortgage loan, with the current holder of the existing loan or plan, a servicer acting on behalf of the current holder, or an affiliate of either.

This means that § 1026.32(b)(1) “points and fees” detailed in sections (i), (ii) and (v) – which include finance charges as described in § 1026.4(a) and (b), compensation paid to loan originators and the maximum prepayment penalty in the loan contract – should NOT be deducted from the Amount Financed (even if financed by the creditor) when calculating the “Total Loan Amount.”

General QMs as of oct. 1, 2022

Question: The General Qualified Mortgage provisions require creditors to develop written policies and procedures for evidencing repayment ability and increased documentation requirements evidencing we followed our policies and procedures. Do these requirements also apply to the other Qualified Mortgage standards — such as the Small Creditor QM and Balloon Payment QM?

Answer: Only the General QM standards expressly require written policies and procedures for evidencing a borrower’s repayment ability. The expanded documentation requirements also only apply to General QMs.

However, the overriding requirement under the Ability to Repay rule — whether making an ATR loan, General QM, Small Creditor QM or Balloon Payment QM — is to make a reasonable determination that the borrower will be successful in repaying the loan according to the loan terms. The Official Staff Commentary to §1026.43(c)(1), comment 1 states, “Whether a particular ability-to-repay determination is reasonable and in good faith will depend not only on the underwriting standards adopted by the creditor, but on the facts and circumstances of an individual extension of credit and how a creditor’s underwriting standards were applied to those facts and circumstances.” So while creditors are not expressly required to have written policies and procedures when making ATR loan, Small Creditor QMs and Balloon Payment QMs, they are expected to have underwriting standards and maintain evidence those standards were followed. Thus, have underwriting standards and documentation that those standards were followed is critical in evidencing repayment ability for any loan subject to the ATR rules. (April 2021)

Question: We have a 5/3 ARM product. The first payment change is the 61st payment but the rate changes before that. When determining the rate spread for the General QM’s priced-based threshold, do we use the original APR as disclosed on the Closing Disclosure or should we recalculate the APR using the highest rate possible at the first rate change?

Answer: Section 1026.43(e)(2)(vi) includes a special rule for determining the annual percentage rate for a loan for which the interest rate may or will change within the first five years after the date on which the first regular periodic payment is due. The focus should be on when the interest rate, NOT the payment, changes. So if the interest rate changes before the fifth year anniversary of the first payment date, you must use the highest rate possible in that five year period according to the loan terms when calculating the APR for determining General QM status and assume that rate will be in effect for the entire loan term.

Question: Are the rules for calculating the APR for variable rate loans for General QM price-based threshold rules different for 2nd mortgages? For example, if our second mortgage loan terms call for the initial rate, based on Prime, to be in place for five years, can we use the initial rate to calculate the loan’s APR to qualify for General QM status?

Answer: The rules for calculating the rate spread for General QM qualification purposes are the same for first and subordinate liens. If the loan’s interest rate (not payment) may change within the first five years after the date on which the first regular periodic payment is due, the bank must use the highest rate possible in that five year period for purposes of the APR calculation in determining if the loan qualifies for General QM status. So you will need to review the loan terms to determine (1) when the first periodic payment was due; (2) calculate the date that is five years from that first periodic payment date; (3) determine the date the interest rate (not the resulting payment from the rate change) may change; and finally, (4) if the interest rate change date is before the five-year anniversary of the first periodic payment, recalculate the loan’s APR using the highest rate possible in that five-year period. Often the interest rate change dates are tied to the note or consummation date, not the first payment date. As a result, the interest rate change date occurs before the five year anniversary of the first payment. But again, you must carefully review the loan terms to determine if a rate change may occur within the first five years from the first periodic payment due date.

Question: When using the General QM rule for a variable rate loan, if the loan date is February 15, 2022 with a first payment date of April 1, 2022, would the five year period end on March 1, 2027 (the 60^th payment) or would it end on April 1, 2027 (the five year anniversary of the first payment date)?

Answer: The five year period ends on the anniversary date of the first payment, meaning April 1, 2027. Therefore if the rate changes prior to April 1, 2027, the creditor would be required to consider the maximum increase for that rate in its APR calculation when determining if the loan is a General QM and also in calculating the monthly payment for the DTI calculation.

Question: How do the “consider and verify” requirements related the General QM align with the ability to repay requirements. What are the differences?

Answer: They are similar but not identical. The basic ability to repay rules require the creditor to “consider and verify” all eight underwriting criteria. Whereas, the General QM rule actually does not explicitly require the creditor to consider and verify all eight elements outlined in the ATR rule, but still requires creditors to include processes to consider all elements in the underwriting process. See the IBA’s ATR/QM Features, Limitations & Prohibitions Guide, effective for applications received on or after March 1, 2021 for a comparison of the requirements. This guide is also available on the IBA’s website, Tools and Resources page, under the Loan Forms and Compliance Guides > Ability to Repay-Qualified Mortgage section.

Questions: Do the expanded documentation requirements to support your underwriting analysis apply to all forms of QMs and ATR loans or just the General QM loans?

Answer: The expanded documentation requirements apply only to the General QMs. However, documentation is critical in evidencing repayment ability for any loan subject to the ATR rules – whether making an ATR loan, General QM, Small Creditor QM or Balloon Payment QM.

Tools

2025 Small Creditor – Small Servicer Guide

2025 ATR – QM Features, Limitations and Requirements Guide

2025 Sample Mortgage Loan Underwriting Guidelines

2025 Balloon Payment QM Documentation Worksheet

2025 Price-Based QM Documentation Worksheet

2025 Seasoned QM Documentation Worksheet

2025 Small Creditor QM Documentation Worksheet

2025 Sample Price-Based QM Procedures

ATR Documentation Worksheet-Amortizing Loan (no balloon payment)

ATR Documentation Worksheet-Amortizing Loan with Balloon Payments

DTI-Based General QM Documentation Worksheet