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InfoSight Highlight: Ability to Repay/Qualified Mortgages
Friday, June 2, 2017 7:00 AM

Credit unions that make closed-end consumer loans secured by a dwelling must comply with the Consumer Financial Protection Bureau’s Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule for loan applications. 

When a credit union complies with the ATR rule and underwrites certain “qualified mortgages,” it has certain protections from legal liability. The rule requires that the credit union assess a member’s ability to repay for virtually all closed-end residential mortgage loans secured by the member’s dwelling.

Prior to the ATR/QM rule, Regulation Z, which implements the Truth in Lending Act (TILA), prohibited a creditor from making a higher-priced mortgage loan without regard to the member’s ability to repay the loan. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended TILA to adopt similar ATR requirements for virtually all closed-end mortgage loans. The Dodd-Frank Act also provides a presumption of compliance with ATR requirements and protections from legal liability for a certain category of mortgages called qualified mortgages (QMs).

The Ability-to-Repay Rule: 

  • Expands coverage of the ATR requirements to any consumer credit transaction secured by a dwelling, except an open-end credit plan, credit secured by an interest in a timeshare plan, reverse mortgages, and temporary loan.
  • Prohibits a creditor from making a mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information, that the consumer has a reasonable ability to repay the loan according to its terms and all applicable taxes, insurance, and assessments.
  • Provides a presumption of compliance with the ability-to-repay requirements if the mortgage loan is a qualified mortgage, which does not contain certain risky features and does not exceed certain thresholds for points and fees on the loan and which meets such other criteria as the CFPB may prescribe.
  • Prohibits prepayment penalties unless the mortgage is a fixed-rate qualified mortgage that is not a higher-priced mortgage loan, and the amount and duration of the prepayment penalty are limited.