The Ability to Repay Rule (ATR)

Ability to Repay Rule

One of the most impactful rules associated with The Dodd Frank Act is The Ability to Repay Rule.  The Ability to Repay Rule sets a standard that mortgage lenders must meet when originating new mortgages.

The goal of this section of The Dodd Frank Act is to make sure that Mortgage Lenders are originating home loans with monthly relative payments that consumers can afford or repay.  The general standard set forth by The Ability to Repay Rule is that lenders must perform diligent underwriting when determining whether or not a consumer has the ability to repay their mortgage.

The purpose of the Ability to Repay Rule

The Ability to Repay Rule’s primary purpose is to make sure lenders are properly assessing whehter or not consumers will be able to make their monthly mortgage payments.  Nothing new here when you compare this to what mortgage lenders have been doing in recent years.  The only difference is that as of 2014 there is a law that says they have to do this.

The Ability to Repay Rule will help a court of law determine whether or not a mortgage lender was negligent in placing a consumer into a mortgage that they could not afford.   If and when a consumer takes their mortgage lender to court after they foreclose/default on their home loan this rule would be the basis of the courts decision.  If a court finds that a mortgage lender was negligent in determining that a consumer could make their mortgage payments that lender may be liable for financial damages.

Ability to Repay Rule Guidelines

The Ability to Repay rule contains no specific underwriting guidelines.  The rule does set forth a general standard that states lenders must perform due diligence when underwriting a loan application and determining whether a consumer can repay the mortgage.  While the overall rule is a bit vague, there is a sub-rule that offers mortgage lenders a bit more guidance.  This sub-rule is called the “Qualified Mortgage Rule.”

What is a Qualified Mortgage?

The Qualified Mortgage section of the Ability to Repay rule sets forth a set of specific underwriting guidelines that when followed by a mortgage lender give that lender something called a “safe harbor.”   “Safe harbor” means that if a lender follows the rules set forth in the Qualified Mortgage section of the Ability to Repay Rule within The Dodd Frank Act they cannot be sued in a court of law if the consumer defaults or forecloses (except for under a few exceptions).

There are 4 different types of qualified mortgages defined within The Dodd Frank Act.   Primarily, Arizona mortgage lenders will be originating their Qualified mortgages according to only 2 types of Qualified Mortgages:

1. General Qualified Mortgage
2. Temporary Qualified Mortgage.

The Temporary Qualified Mortgage rules allow lenders to utilize the same pre-Dodd Frank debt to income ratios they used when qualifying new borrowers.  The General Qualified Mortgage rules are a bit more stringent and specific.  Temporary Qualified Mortgage Rules are effective for 7 years OR until FHA, VA, USDA, Fannie Mae or Freddie Mac come up with their own Qualified Mortgage rules.  In essence, Temporary Qualified mortgage rules keep things very similar to the way they were before Dodd Frank.

A lender may originate either a General Qualified Mortgage OR a Temporary Qualified Mortgage in order to be protected under the “safe harbor” provision.  Lenders can also originate Non-qualified Mortgages however doing so opens that lender up to more liability in a court of law.

Dodd Frank & You

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By Jeremy House
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