In January 2019 the Consumer Financial Protection Bureau (“Bureau”) published its 271-page report assessing its Ability to Repay-Qualified Mortgage rule.  This Bureau must conduct this assessment under section 1022(d) of the Dodd-Frank Act, which mandates that the agency publish a report of its assessment within five years of the effective date of the rule.   You can find the report, which is entitled the “Ability-to-Repay and Qualified Mortgage Rule Assessment Report” (the “Report”), here.  We previously wrote about here.   This report finds that the market has not adopted “non-QM” lending to the extent it expected.  We believe that because of the planned sunset of a temporary safe harbor in the rule for loans approved for sale to the GSEs, the industry may need to begin looking at how to safely conduct non-QM lending. 



Recall that in July 2010, the Dodd-Frank Act amended to the federal Truth in Lending Act (“TILA”) to require lenders to make a good faith determination that borrowers have the ability to repay the loan before a loan is made, create a safe harbor for “qualified mortgages,” and require the Bureau to issue rules implementing this requirement. In response, on January 30, 2013 the Bureau published the Final Rule implementing the Ability to Repay requirements in the Federal Register (“ATR Rule”), which became effective almost one year later on January 10, 2014.

The stated purpose of the Dodd-Frank Act’s ability-to-repay requirement was to ensure “consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans, the loans are understandable and not unfair, deceptive or abusive.”  But Congress also stated an interest in ensuring that and consumers still had access to “responsible, affordable” credit.

To that end, the ATR Rule required mortgage lenders to ensure that all borrowers had the ability to repay their loans by considering eight specific elements:

1.      The borrower’s current or reasonably expected income or assets, other than the value of the dwelling;

2.      The borrower’s employment status;

3.      The monthly payment on the loan;

4.      The monthly payment on any simultaneous loan(s) that the creditor knows or has reason to know will be made;

5.      The monthly payment for mortgage-related obligations;

6.      The borrowers’ current debt obligations, alimony, and child support;

7.      The overall monthly debt-to-income ratio or residual income; and

8.      The borrower’s credit history.


The ATR Rule established the Qualified Mortgage loan which, by application of the ATR Rule, results in three classes of mortgage loans: The Safe Harbor Qualified Mortgage loan (“Safe Harbor Loan”), the Rebuttable Presumption Qualified Mortgage Loan (“Rebuttable Presumption Loan”)(collectively, these two are “QM Loans”), and the Non-Qualified Mortgage Loan (“Non-QM Loans”).

Safe Harbor Qualified Mortgage: Generally, a Safe Harbor Loan  is one in which the borrower has limited-to-no opportunity to  challenge the lender’s determination that the borrower had the ability to repay the loan at time of origination, provided the lender determined the borrower’s the Debt-to-Income Ratio (“DTI”) did not exceed 43% as calculated by Appendix Q to Regulation Z, and the points and fees do not exceed 3% of the total loan amount.  Here, the lender is afforded strongprotection from a claim by a borrower that the lender failed to establish the borrower’s ability to repay at the time of the loan was made.

Importantly, in the ATR Rule, the Bureau deemed any loan underwritten pursuant to Fannie Mae or Freddie Mac’s guidelines as a Safe Harbor Loan, even if the DTI exceeded 43% or the points and fees exceeded 3% of the total loan amount. This temporary QM exemption, commonly referred to as the “GSE patch”, expires by operation of rule on January 10, 2021, or whenever the GSEs come out of conservatorship, whichever comes first. Additionally, the Federal Housing Authority, the Veterans Administration, the United States Department of Agriculture and the Rural Housing Service all issued regulations pursuant to their respective regulatory authority to deem any loans insured by any of those agencies as a Safe Harbor QM Loan.

Rebuttable Presumption Qualified Mortgage: Generally, a Rebuttable Presumption Loan  is a QM loan that is “higher priced.”  For these loans, the lender is presumed to have complied with the ATR Rule, but the borrower is permitted to challenge or “rebut” that presumption by showing, for example, he lender’s underwriting practices were unsafe or unsound. The loans falling into this category are those in which the DTI did not exceed 43%, the points and fees did not exceed 3% of the total loan amount, and the loan is a Higher Priced Mortgage Loan as defined in Regulation Z (i.e., where the APR is greater than the Freddie Mac Average Prime Offer Rate plus 1.5% for first mortgages and 3.5% for second mortgages). Here, a borrower must first meet a certain legal burden of proof before the lender could be exposed to liability in such a lawsuit for failing to comply with the ATR Rule.  

Non-Qualified Mortgage:  A loan that is defined as neither a Safe Harbor Loan or a Rebuttable Presumption Loan is generally defined as a Non-QM loan. This is a loan where the lender is not afforded any legal protections regarding the quality of their underwriting and their assessment of the borrower’s ability to repay the loan. This applies to loans that did not meet the QM standard because the DTI ratio exceeded 43%, or the requirements in Appendix Q were not used to determine ability to repay, the loan contained certain attributes that disqualify it from being a QM loan, or points and fees exceeded 3% of the total loan amount. Here, the borrower need only allege – without proof - that the lender maintained unsafe and unsound underwriting practices triggering an ATR Rule violation, shifting the legal burden to the lender to prove otherwise.

The Report

Currently, there exists no single data set for the Bureau to assess the impact of the ATR Rule. To achieve its objective, the Bureau turned to different industry sources to generate the Report, including FHFA’s National Mortgage Database, Black Knight’s “McDash” data set, CoreLogic’s Loan-Level Market Analytics data, Home Mortgage Disclosure Act data, Desktop Underwriter and Loan Prospector Automated Underwriting data, the Mortgage Bankers Association’s Annual Mortgage Bankers Performance Reports, the Conference of State Bank Supervisors Public Survey data, Application data from nine unnamed lenders who provided information to the Bureau specifically for this assessment, the responses of 190 lenders who responded  to a lender survey the Bureau commissioned for this assessment, and other industry data and reports.

Armed with this data, the Bureau was able to draw conclusions about multiple facets of the ATR Rule in the Report, including the effects it had on loan performance, the impact the GSE Patch had on the intended effects of the ATR Rule, and how Non-QM loans fared during this period.

As it relates to the last – Non-QM loans – the Bureau reported that it had expected a greater presence of Non-QM loans since the ATR Rule went into effect. Between the GSE Patch and legal uncertainty associated with Non-QM loan, the Bureau postulates that this could have chilled the enthusiasm for lenders to make Non-QM loans. Based on the following statements in the Report, we gain a sense of the Bureau’s impressions of Non-QM.

·        In 2005-2007, approximately 24 to 25 percent of loans originated had DTIs exceeding 45%. After the ATR Rule came into effect, only 5 to 8 percent of conventional loans for home purchase had DTIs exceeding 45%. (Pages 9 and 82).

·        The ATR Rule displaced between 63 and 70 percent of approved applications for home purchase among Non-QM high-DTI borrowers during the period of 2014 – 2016. According to the data sources, this translates into a reduction of between 1.5 and 2.0 percent of all loans for home purchase. (Pages 10 and 117).

·        At the time the ATR Rule went into effect the Bureau expected that there would be a “robust and sizable market” for non-QM loans beyond the 43 percent threshold and structured the ATR Rule to try to ensure that this market would develop. The Bureau appears surprised this did not happen. (Page 26).

·        The extra risk associated with Non-QM loans is one of the factors that has had a chilling effect on the mass adoption of Non-QM loans; and thus, is affecting access to credit to some degree. (Pages 116 and 118).

·        The ATR Rule had at least some chilling effect on the submissions or approvals of Non-QM loans, though the Bureau was not sure if the result was an intended or unintended consequence. (Page 149).

·        The Bureau estimates that non-QM loans primarily consists of loans that are not eligible for purchase by GSEs, with DTI ratios exceeding 43 percent. Borrowers may include those with irregular income, certain self-employed borrowers, and those with little or no credit history. (Page 116)

·        Forty percent of loan applications for self-employed borrowers experienced issues in complying  with Appendix Q for income qualification (Table 22, Page 155).

·        Lack of broader adoption of Non-QM by the industry may occur because of the higher inherent risk associated with self-employed borrowers and the difficulties in complying with the income documentation requirements in Appendix Q. (Page 154).

·        [S]elf-employed borrowers who do not qualify for a loan that is eligible for purchase or guarantee by one of the GSEs or federal agencies need to qualify under the general QM standard in order to obtain a QM loan. Lenders who responded to the Bureau’s survey in preparation of the Report indicated that lenders may find it difficult to comply with Appendix Q relating to the documentation and calculation of income and debt for self-employed borrowers. (Page 11)

·        Non-QM loans are now making the way to market in greater numbers than the initial years following the effective date of the Final ATR Rule, largely targeting self-employed borrowers. (Page 197).

·        The application data show a far greater decline in high-DTI lending in the non-GSE space compared to loans purchased or guaranteed by the GSEs.. Although the Bureau expected that loans with DTI above the 43 percent threshold would increasingly be originated outside the GSE Patch(i.e., as non-QM loans), the available data suggests that the opposite is happening. (Page 191)

·        One of the reasons lenders tended to flock to Fannie and Freddie is because the underwriting guidelines are far more established than those set forth in Appendix Q, which has some perceived lack of clarity. The Bureau discovered that lenders found the information contained in Appendix Q confusing and unworkable, and is ambiguous and leads to uncertainty. (Page 192).

·        Approximately 29 percent of loans sold to Fannie Mae and 21 percent of loans sold to Freddie Mac have DTIs over 43%. (Page 195). This is greater than the Bureau had anticipated when the ATR Rule went into effect.


What This Means

The following conclusions could be drawn from this:

·        Even though Non-QM loans, particularly those made to self-employed borrowers, perform well, lenders still have limited Non-QM loan offerings.

·        Lenders seemed to favor making  Safe Harbor loans, especially those intended to be sold to the GSEs where the DTI can exceed 43%.

·        By applying the requirements of Appendix Q, self-employed borrowers have greater challenges in securing a loan approval from a lender than, for example, borrowers who evidence income via a W2. Safe Harbor Loan

·        Fannie and Freddie appear to adjust to market conditions, by adjusting their guidelines to market demands, whereas the Bureau’s Appendix Q does not offer such adjustments and has room for improvement

·        There is no evidence in the Report suggesting that the additional controls and legal impacts of the Non-QM provisions reasonably mitigates the risk to the consumer.

This means there is still opportunity to improve the ATR Rule with more clarity and adjustments to the legal impact of some of its provision, while still achieving its primary objective of ensuring consumers are offered loans that reasonably reflect their ability to repay.  Trade associations, including both the Mortgage Bankers Association and the American Bankers Association, and other stakeholders have expressed interest in working with the Bureau to discuss possible amendments to the ATR Rule.  Among other things, we expect these efforts will include discussions concerning some adjustments to Appendix Q, the GSE Patch, and the perceived risk associated with Non-QM loans.


Of primary concern for the industry should be the potential expiration of the GSE patch.  As it is evident that, because of the availability of the GSE patch, lenders have been avoiding the Non-QM space for high-DTI borrowers (and perhaps for other loan types as well) , the upcoming expiration in 2021 would have a great impact of lenders’ compliance programs and risk profiles.  The CFPB may extend the patch, or revise the ATR rule to address this issue, but the CFPB could also let the patch expire taking no further action.  It may be prudent for lenders to start considering how to safely take part in the non-QM market. 


Please contact us if you would like any assistance with your organization’s non-QM program or other issues under the ATR rule.