The Ability to Repay (ATR) rule, established by the Dodd-Frank Act and implemented by the CFPB, requires lenders to make a reasonable, good-faith determination that a borrower can repay a loan before originating it. Every residential mortgage loan in the United States is subject to ATR, not just QM loans.
The Eight ATR Factors
- ✦Current or expected income or assets.
- ✦Current employment status.
- ✦Monthly mortgage payment on the covered loan.
- ✦Monthly payment on simultaneous loans secured by the same property.
- ✦Monthly payment for mortgage-related obligations: taxes, insurance, and HOA.
- ✦Current debt obligations, alimony, and child support.
- ✦Debt-to-income ratio or residual income.
- ✦Credit history.
Documentation Standard
- ✦Income must be verified through documents; lenders cannot rely on stated income for ATR compliance.
- ✦Employment must be verified at or near closing.
- ✦Non-traditional income (bank statement, asset depletion) satisfies ATR if the lender uses a documented, consistent methodology.
- ✦Verbal VOE is acceptable for confirming employment status but written documentation is best practice.
ATR vs. QM
Meeting all eight ATR factors does not make a loan a QM. QM has additional structural requirements: DTI cap, no balloon, no negative amortization, and points-and-fees cap. A non-QM loan that properly documents all eight ATR factors is ATR-compliant but lacks safe harbor protection. MLOs should document their ATR analysis consistently across all loan types to reduce litigation exposure on non-QM originations.
Aria can explain ATR documentation requirements, identify what qualifies as income verification under the rule, and help MLOs structure non-QM files to be ATR-compliant. Ask at vicariointel.com.
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