Ability-to-Repay Rule (ATR)

The ability-to-repay rule is the requirement in 12 CFR 1026.43(c), implementing 15 U.S.C. 1639c(a), that a creditor may not make a closed-end consumer loan secured by a dwelling unless it "makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms." The determination must consider eight listed factors and must rest on verified third-party records. The Consumer Financial Protection Bureau's official name for the framework is the "Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule)": the ability-to-repay half is the duty described here, and the qualified-mortgage half is a checklist that, if met, lets the creditor presume the duty was satisfied. This site covers them on two pages because a reader asking "what must a lender check before lending to me?" and a reader asking "is this loan a qualified mortgage?" need different answers; the regulation itself captions the duty simply "Repayment ability".

What the statute added in 2010. Before the Dodd-Frank Act, federal law required ability-to-repay underwriting only for high-cost mortgages under the Home Ownership and Equity Protection Act. Section 1639c(a)(1) of Title 15 extended a version of that duty to every "residential mortgage loan": no creditor may make one "unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments." The statute names the point of measurement (consummation), the standard (reasonable and good faith), and the evidentiary basis (verified and documented). Regulation Z turns those into a procedure.

Who is covered. Under 1026.43(a) the section reaches "any consumer credit transaction that is secured by a dwelling", with three groups of exceptions. Home equity lines of credit and loans secured by a timeshare interest are outside the section entirely. Reverse mortgages, temporary or "bridge" loans of 12 months or less, the construction phase of a construction-to-permanent loan, and credit extended under Housing Finance Agency programs or by designated community development lenders are excluded only "for purposes of paragraphs (c) through (f)", which means the repayment-ability duty and the qualified-mortgage definitions do not apply to them while the section's other provisions still do. A loan that is outside 1026.43(c) may still be subject to a separate repayment-ability standard elsewhere: 1026.34(a)(4) imposes one on open-end high-cost mortgages, for example.

The eight factors, and the one everyone misreads. Paragraph (c)(2) says a creditor "must consider" (i) current or reasonably expected income or assets, other than the value of the dwelling itself; (ii) current employment status, if employment income is relied on; (iii) the monthly payment on the loan being made; (iv) the monthly payment on any simultaneous loan the creditor knows or has reason to know about; (v) monthly mortgage-related obligations, meaning property taxes, required insurance and similar charges; (vi) current debt obligations, alimony and child support; (vii) "the consumer's monthly debt-to-income ratio or residual income"; and (viii) credit history. Factor (vii) is the one that gets turned into a number that does not exist. The regulation requires the creditor to consider the ratio or the residual, and (c)(7) defines both: total monthly debt obligations are the sum of the new payment, simultaneous loans, mortgage-related obligations and existing debts, and total monthly income is "current or reasonably expected income, including any income from assets". It never says what ratio is too high. The creditor chooses the metric and the threshold, and must be able to defend the choice as reasonable and in good faith. The 43 percent ceiling that appears in older articles was part of the qualified-mortgage definition in (e), not of (c), and the phrase "43 percent" no longer appears anywhere in the section.

The payment that must be counted. Under (c)(5), for most loans the monthly payment used in the determination is computed at "the fully indexed rate or any introductory interest rate, whichever is greater", on a fully amortizing schedule. So an adjustable-rate loan is not tested at its teaser rate, and an interest-only loan is not tested at its interest-only payment. This is the provision that closed the door on the pre-2008 practice of qualifying a borrower at a payment that was guaranteed to rise.

Verification. Paragraph (c)(3) requires the creditor to verify the information it relies on "using reasonably reliable third-party records", and (c)(4) lists what counts for income and assets: a tax-return transcript from the IRS, filed tax returns, W-2s, payroll statements including military Leave and Earnings Statements, financial institution records, employer records, and government benefit statements among others. Employment status may be verified orally if the creditor prepares a record of what it was told. Debts may be taken from a credit report, and if the application discloses a debt the report does not show, the creditor may rely on the application rather than chase a second source. A loan underwritten on the borrower's unverified word about income is not a compliant loan, whatever else is true about it.

The remedy is what makes the rule bite. A creditor that violates 1639c(a) is liable under 15 U.S.C. 1640(a)(4) for "an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material", on top of actual damages and attorney's fees. And under 1640(k), when a lender or its assignee forecloses, the borrower "may assert a violation ... of section 1639c(a) ... as a matter of defense by recoupment or set off without regard for the time limit on a private action for damages". The ordinary limitations period for a damages suit is short; the window for raising the defense is not, although 1640(k)(2)(B) caps the finance-charges component of a late judgment at what it would have been the day before that limitations period expired. That asymmetry is the reason lenders want the qualified-mortgage presumption, which the sibling page explains, and it is also why the presumption for a higher-priced loan is only rebuttable: the rule reserves the borrower's ability to show that the numbers the lender had at closing left no room for living expenses.

The determination runs before closing and follows the regulation's own order. The creditor gathers third-party evidence of income and assets, confirms employment, computes the payment on the new loan at the fully indexed rate on an amortizing schedule, adds any simultaneous loan and the monthly cost of taxes and insurance, pulls a credit report for existing debts and adds any alimony or child support, and then compares total monthly debt obligations with total monthly income as a ratio or a residual dollar figure. It records the result and the reasoning. If the loan also fits the qualified-mortgage checklist the creditor gains a presumption that this work was done properly; if not, the file itself is the lender's defense.

Take an example. Aisha applies for a $300,000 30-year adjustable-rate mortgage with an introductory rate of 5.00 percent that adjusts to an index plus a margin; the fully indexed rate on the day of underwriting is 6.75 percent. The rule requires the greater of the two, so the qualifying payment is the fully amortizing payment at 6.75 percent, about $1,946 a month, not the $1,610 the introductory rate would produce. Her verified gross income from tax transcripts and recent pay stubs is $9,200 a month. Property taxes and insurance add $520 a month, her credit report shows a $410 car payment and a $150 student loan payment, and she has no simultaneous loan. Total monthly debt obligations are $1,946 + $520 + $410 + $150 = $3,026. Her debt-to-income ratio is $3,026 divided by $9,200, which is 0.3289, or about 32.9 percent, and her residual income after those obligations is $9,200 − $3,026 = $6,174 a month. Nothing in the rule says 32.9 percent passes or fails; the creditor applies its own documented standard, notes that every input was verified, and the file shows a reasonable, good-faith determination. Had the creditor qualified her at the $1,610 introductory payment instead, the ratio would have read a more flattering 29.2 percent, and the determination would not have complied with (c)(5).

Pros

• It ends the stated-income and teaser-rate underwriting that produced unaffordable loans before 2008: every relied-on figure must be verified, and the payment is tested at the rate the borrower will face.
• The list of factors is public, so a borrower can anticipate what will be asked for and assemble the records in advance.
• The foreclosure defense in 15 U.S.C. 1640(k) outlives the ordinary limitations period, so a borrower sold an unaffordable loan is not time-barred from raising it when it matters most.
• Because the rule sets a standard rather than a number, it can accommodate a borrower with high assets and modest income, or a strong residual-income position, that a fixed ratio would reject.

Cons

• The rule protects against a lender's failure to check, not against a borrower's own optimism. A determination can be reasonable and in good faith and the payment can still crowd out everything else.
• Verification takes documents and time, and borrowers with irregular or self-employment income carry a heavier paperwork burden than salaried ones.
• Because the rule names no threshold, lenders set their own, and a borrower turned down by one lender's standard may pass another's without learning why.
• The carve-outs mean some loans that feel like mortgages, such as a HELOC or a 12-month bridge loan, are underwritten without this duty at all.