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Issue

Ability to Repay and "Qualified Mortgage" Exemption

Restructuring Qualified Mortgages as a Legal Safe Harbor

ABA Position

ABA has consistently expressed that the ATR rules are needlessly complex and exceedingly restrictive. ABA recommends a comprehensive review of ATR rules to refine and simplify numerous provisions with the objective of facilitating compliance and expanding safe lending options in all communities. ABA’s priority is to identify a viable replacement for the lapsing “GSE QM” provision, the safe harbor that sustains most mortgage lending in residential markets.

The Ability-to-Repay Rule requires all creditors to determine a consumer's ability to repay a mortgage before making a loan. The key requirement of the Rule is that lenders must make a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay before issuing a residential mortgage loan. The Rule defines documentation requirements and details the factors that a lender must consider in making such a determination and requires that the determination must be made using a payment schedule that fully amortizes the loan over the term of the loan. Failure to comply with the ATR Rule can result in severe statutory penalties and damages under TILA that include the ability of an aggrieved borrower to raise claims as an offset to foreclosure at any time during the life of the loan.

The Rule defines several categories of Qualified Mortgage (QM) loans and provides that QM loans are presumed to comply with the ability-to-repay requirement. In most cases, the presumption is conclusive (via a safe harbor). However, for “high cost” loans, the presumption is rebuttable, allowing the consumer the opportunity to prove that the lender in fact failed to make a reasonable determination of the consumer’s repayment ability. The Rule creates a temporary category under which loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac (the Government Sponsored Enterprises, or GSEs) generally qualify as QM loan. This exception (the Temporary GSE QM) is scheduled to expire in January 2021 (or earlier if the GSEs cease to be in conservatorship).

The Ability-to-Repay Rule requires all creditors to determine a consumer's ability to repay a mortgage before making a loan. The key requirement of the Rule is that lenders must make a reasonable and good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay before issuing a residential mortgage loan. The Rule defines documentation requirements and details the factors that a lender must consider in making such a determination and requires that the determination must be made using a payment schedule that fully amortizes the loan over the term of the loan. Failure to comply with the ATR Rule can result in severe statutory penalties and damages under TILA that include the ability of an aggrieved borrower to raise claims as an offset to foreclosure at any time during the life of the loan.

The Rule defines several categories of Qualified Mortgage (QM) loans and provides that QM loans are presumed to comply with the ability-to-repay requirement. In most cases, the presumption is conclusive (via a safe harbor). However, for “high cost” loans, the presumption is rebuttable, allowing the consumer the opportunity to prove that the lender in fact failed to make a reasonable determination of the consumer’s repayment ability. The Rule creates a temporary category under which loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac (the Government Sponsored Enterprises, or GSEs) generally qualify as QM loan. This exception (the Temporary GSE QM) is scheduled to expire in January 2021 (or earlier if the GSEs cease to be in conservatorship).

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