	Introduction

On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) released a final rule implementing the Ability-to-Repay (ATR) requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. The final rule is effective January 10, 2014, one year after it was issued. Description of Final Rule10

Prior to offering a borrower a mortgage that is subject to the rule, the ATR rule will require a lender to determine, based on documented and verified information, that the borrower has the ability to repay the loan. Failure to comply could result in a lender having to pay damages to a borrower who brings a lawsuit and claims that the lender did not follow the ATR rule. With regard to product-feature restrictions, a QM cannot have
A lender that originates a QM is entitled to a "presumption of compliance" with the ATR requirement, but the type of presumption of compliance and the amount of legal protection the lender receives depends on the mortgage interest rate. In addition, if the mortgage is otherwise a QM (meets the other underwriting and product feature requirements), the subprime borrower could win his case if the court finds that "the creditor did not make a reasonable and good faith determination of the consumer's repayment ability at the time of consummation." Temporary Agency/GSE QM Option

The CFPB is concerned that lenders may initially only originate mortgages that meet the QM standards because "of the fragile state of the mortgage market as a result of the recent mortgage crisis." The CFPB final rule, therefore, establishes a Temporary Agency/GSE QM Option for loans eligible to be purchased by Fannie Mae and Freddie Mac or to be insured by the government through the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the U.S. Department of Agriculture (USDA), or the Rural Housing Service (RHS). In addition, the loan must
meet the QM requirement that a lender verify a borrower's income, assets, and debt obligations; have a term of between 5 years and 30 years; have a fixed interest rate; satisfy the QM requirement that the lender determine that the borrower can afford all scheduled payments besides the balloon payment given the borrower's income and assets; not be subject to a forward commitment (an agreement to sell the loan) at the time the loan is consummated; and not have negative amortization. Higher-priced mortgages afford a rebuttable presumption and non-higher-priced mortgages provide the lender with a safe harbor. As part of its analysis of the final rule, the CFPB estimated the fraction of the mortgage market at various points in time that would satisfy the ATR rule and receive the different types of QM status. The CFPB also analyzed the mortgage market as of 2011. An additional 22% would have satisfied the ATR rule through the general ATR option (though not receive QM status) and the final 8% would not have complied with the final rule. Using data from 2011, the CFPB estimated that "76 percent of mortgages would have been qualified mortgages inside the safe harbor, 2 percent of mortgages would have been qualified mortgages with a rebuttable presumption, and 22 percent of mortgages would have been subject to the ability-to-repay requirements." Jumbo loans may be most affected in the short term by the QM rule. Additional Selected Issues

In addition to affecting who may receive a mortgage, the ATR rule may have other effects on the mortgage market. Relationship to Other Rules

The Ability-to-Repay rule is one of several mortgage market rules required by the Dodd-Frank Act that were released by the CFPB in January 2013.
On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) released a final rule implementing the Ability-to-Repay (ATR) requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The rule is effective January 10, 2014. The ATR rule will require a lender to determine based on documented and verified information that at the time a mortgage loan is made, the borrower has the ability to repay the loan. Failure to make such a determination could result in a lender having to pay damages to a borrower who brings a lawsuit claiming that the lender did not follow the ATR rule.
The final rule provides multiple ways for a lender to comply, one of which is by originating a Qualified Mortgage (QM). To receive QM status, a loan must meet certain underwriting and product-feature requirements. For example, in most cases a QM cannot have a balloon payment (a large payment that is typically due at the end of the loan). If a loan is a QM, then the lender receives a presumption of compliance for legal purposes.
The type of presumption of compliance that a QM receives depends on the rate of the loan. If the loan is a higher-priced mortgage (the mortgage's rate exceeds the average rate for a prime mortgage by more than 1.5 percentage points for a purchase), then the lender receives a rebuttable presumption of compliance. It is presumed that the lender complied, but the borrower could win his case if, for example, the court finds that the lender should have known that the borrower did not have sufficient residual income after paying his mortgage and other obligations to afford his living expenses. If the QM is not a higher-priced mortgage, then the lender receives a safe harbor. So long as the mortgage meets the QM standards, the lender is considered to have complied with the ATR rule.
Some are concerned that, at least in the short term, only mortgages meeting the QM standards will be originated because of the legal protections they afford, even though there are other means of complying with the ATR rule. The definition of QM, therefore, could determine who would receive a mortgage in the future. To increase access to credit, the CFPB also included a temporary QM option for loans eligible to be purchased by Fannie Mae and Freddie Mac or to be insured by the government through the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the U.S. Department of Agriculture (USDA), or the Rural Housing Service (RHS). According to the final rule, the temporary option would last for, at most, seven years from when the rule goes into effect in January 2014.
The CFPB's analysis of the mortgage market as of the end of 2011 concluded that, excluding the temporary option, approximately 76% of mortgages would have received safe harbor QM status. An additional 2% would have been qualified mortgages with a rebuttable presumption, and 22% would have satisfied the ATR rule through other compliance options. Including the temporary option, the CFPB estimates that more than 95% of the mortgage market as of the end of 2011 would have received QM status. Underwriting standards and access to credit are considered to have been tighter in 2011 than before the housing crisis, however.
In addition to concerns about credit availability, experts have raised other potential issues with the final rule. Some ask how the temporary QM option might affect the government's role in the housing market, while others raise concerns about the final rule's impact on rural and community banks. The ATR rule is one of several mortgage market rules released by regulators; some worry about how the rules, in aggregate, will affect the mortgage market.