The ATR (Ability to Repay) rule is set to be fully implemented soon and if you are not ready for it then fasten your seatbelts, it’s going to be a bumpy ride. The current effective date for the ATR rule (as set forth under the Dodd-Frank Act) is January 14, 2014, this means you have less than 9 months to get your systems, marketing, training, etc.. in place to face these new changes. Let’s look at what loans are subject to the new rule and the 8 underwriting factors that make up the regulation.
The Rule: Creditors must make a reasonable and good faith effort at or before consummation, that the borrower will have a reasonable ability to repay the loan according to its terms. (pretty ambiguous isn’t it?)
The ATR rule applies to all consumer credit transactions secured by a dwelling EXCEPT: home equity lines of credit (HELOC), reverse mortgages, temporary or “bridge” loans less than 12 months, loans secured by an interest in a timeshare plan, and construction phase of 12 months or less on a construction-to-perm loan.
8 general underwriting factors creditors must consider and verify:
1). Borrower’s current or reasonable expected income or assets, except for value of the dwelling that secures the loan.
- Creditors must only consider the income/assets necessary to support the determination the borrower can repay the loan
- Creditors must use third-party records that provide reasonable reliable evidence of the borrower’s income/assets (W2’s, paychecks, tax-returns, bank statements, etc…)
2). Borrower’s current employment status if the borrower’s income from employment is used to determine repayment ability.
- Employment may be full-time, part-time, irregular, etc. as long as the creditor considers these factors when determining the repayment ability
- Creditor may verify orally (VVOE) as long as the creditor prepares a record of the information obtained.
3). Borrower’s monthly payment on the covered transaction
- Must use the fully indexed rate or the intro rate whichever is greater.
- Special rules for balloon, interest-only and neg-am loans:
- Balloon loans that are HPML, creditor must consider the ability to repay based on terms including the required balloon payment.
- Balloon loans that are not higher-priced transaction, the creditor must use the maximum payment scheduled during the first 5 years.
- For interest-only and neg-am loans the creditor must use the fully indexed rate or intro rate whichever is higher and substantially equal, monthly payments of principle and interest that will reply the loan after the loan is recast.
4). Borrower’s monthly payment on any simultaneous loan the creditor knows about or has reason to know will be made
- Basically you must consider and factor in any subordinate financing used at the time of purchase
5). Borrower’s monthly payment for mortgage-related obligations
- Property taxes, MI charges, HOA fees, ground rent or leasehold payments
- Includes only recurring payments regardless if they are included in the monthly payment or if there is an escrow account
6). Borrower’s current debt obligations, alimony and child support
- Does allow the creditor some flexibility to disregard some debts that are likely to be paid off soon after the loan is made (i.e. installment loans with less than 10 payments)
7). Borrower’s monthly debt-to-income ratio (DTI) or residual income.
- Creditor does have some discretion to determine the ATR despite a higher DTI in light of the borrower other assets.
- Creditor must consider the borrower’s residual income when making a credit decision.
8). Borrower’s credit history
- Allows the creditor to determine their own criteria for credit worthiness
- Does allow for nontraditional credit to be considered
If you were in this industry prior to the loose standards of the late 90’s and early 2000’s then this may all seem like common sense. In fact this is really close to how we used to underwrite loans back in the day, before we stopped looking at the borrower and relied only on their score. Of course, as always, the devil is in the details and there are several factors to look closely at to ensure your organization is remaining compliant. Many creditors are seeing the importance of outsourcing some of their more compliant sensitive procedures allowing them to focus more on the production side of the business. As a national Appraisal Management Company with an entire compliance and quality control division, Nationwide Appraisal Network has been helping our clients stay compliant for over 9 years.