- Ability to Repay/Qualified Mortgages (Or Quandary Multiplied?)
- September 3, 2013 | Author: Craig N. Landrum
- Law Firm: Jones Walker LLP - Jackson Office
The Ability-to-Repay ("ATR") requirements for virtually all closed-end residential mortgage loans are scheduled to go into effect January 10, 2014. Coupled with the ATR requirements are the presumptions of compliance with the ATR requirements for certain categories of mortgages called Qualified Mortgages ("QM"). The ATR rule prescribes the minimum standards a bank must use to determine that consumers have the ability to repay the mortgages they are extended, focusing on eight specific factors that must be considered, although no model is prescribed. The QM rules provide an absolute safe harbor for ATR compliance for loans that are not higher priced and a rebuttable presumption of compliance for loans that are higher priced and meet the definition of a qualified mortgage.
QM loans generally cannot contain certain risky features, but more importantly, the rules limit points and fees and require application of certain underwriting criteria. The general ATR standards require creditors to consider debt to income, but do not contain specific debt to income thresholds, while the QM requirements mandate a 43 percent maximum debt to income ratio for an applicant. Balloon loans are practically prohibited since the balloon payment itself needs to be underwritten for higher priced balloon loans that do not meet the requirements of a QM. The statutory damages for violation of the ATR rules are, among other things, up to three years of finance charges and the fees the customer paid as well as legal fees.
Creditors are faced with a number of decisions regarding implementation of the ATR/QM rules. First, if the institution depends on balloon loans that could be considered higher priced, the institution will want to determine if it qualifies for an exemption under either the rural lender rules or the temporary small lender exemption, in either case subject to a $2 billion asset threshold. Alternatively, the institution may want to consider becoming a creditor that is exempt from the ATR/QM requirements—a community development financial institution ("CDFI")—bearing in mind that a loan made by a CDFI is not eligible for QM status. However, a consumer who obtains a loan exempt from the ATR requirements would have no ability-to-repay claim under the ATR/QM rules. Finally, if an institution decides to make only QM loans, the risk of disparate impact must be considered. As noted above, the general QM definition requires that a consumer's total debt to income ratio not exceed 43 percent and points and fees are strictly limited. It is not uncommon, especially in rural areas, for DTI ratios to exceed 43 percent. There is substantial risk that there may be disparate impact if borrowers with ratios exceeding 43 percent are excluded from securing a loan because the lender makes only QM loans. Under the small/rural creditor exception, DTI must be considered, but there is not a specific threshold requirement.
If careful consideration is not given to implementation of the ATR/QM rules or to exemption from the ATR rules, the natural tension between the desire for the certainty of compliance with ATR by making only QM loans and the need to serve a broader expanse of the consumer market may escalate into a perfect fair lending storm.