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The Ability-to-Repay (ATR) Rule

The Ability-to-Repay (ATR) rule requires mortgage lenders to make a reasonable, good-faith determination that a borrower can repay a loan before origination. Implemented under Dodd-Frank through CFPB Regulation Z, the rule mandates verification of eight specific underwriting factors including income, employment, debts, and credit history. Qualified Mortgage (QM) status provides legal safe harbor for ATR compliance, while non-QM lenders must independently demonstrate ATR adherence for each loan.

Key Takeaways

  • The ATR rule requires lenders to verify eight specific factors before originating a mortgage, including income, employment, debts, and credit history.
  • Lenders must use verified documentation, not borrower-stated information, to satisfy ATR requirements.
  • Qualified Mortgage (QM) status provides a legal safe harbor or rebuttable presumption that ATR has been satisfied.
  • Non-QM loans must still comply with ATR but lack the legal protections that QM status provides to the lender.
  • Borrowers have a three-year right of action for ATR violations and a permanent recoupment defense against foreclosure.
  • The ATR rule effectively eliminated stated-income and no-documentation lending that contributed to the 2007-2009 mortgage crisis.
  • Alternative documentation (bank statements, asset depletion) is permitted under ATR as long as the lender verifies ability to repay.
  • The rule does not prohibit any specific loan product — it requires that every loan be supported by verified ability to repay.

How It Works

The Eight ATR Underwriting Factors

The ATR rule requires lenders to consider and verify the following eight factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the mortgage being originated; (4) the monthly payment on any simultaneous loan secured by the same property; (5) the monthly payment for mortgage-related obligations such as property taxes, insurance, and HOA dues; (6) current debt obligations, including alimony and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history .

The critical requirement is that lenders must use verified information, not simply borrower-stated information, for these factors. Income must be documented through tax returns, W-2s, pay stubs, or other reliable third-party sources. Employment must be verified through employer contact or documentation. Debts must be verified through credit reports and other records.

Relationship Between ATR and Qualified Mortgage (QM)

The Qualified Mortgage (QM) designation provides a legal safe harbor or rebuttable presumption that the lender has satisfied the ATR requirement. A loan that meets QM standards is presumed to comply with ATR, protecting the lender against borrower lawsuits alleging an ATR violation. This legal protection is the primary incentive for lenders to originate QM-compliant loans.

Loans that are not QM-compliant (non-QM loans) must still satisfy the ATR rule, but the lender bears the full legal risk of demonstrating compliance. Non-QM lenders typically maintain extensive documentation files to defend against potential ATR challenges. The ATR rule does not prohibit non-QM lending — it requires that lenders verify the borrower’s ability to repay regardless of whether the loan meets QM criteria .

How ATR Applies to Non-QM Loans

Non-QM lenders — those originating loans with features like interest-only payments, terms beyond 30 years, negative amortization, or points and fees exceeding QM limits — must independently demonstrate ATR compliance for each loan. This typically means applying the same verification standards as QM loans (documented income, verified employment, credit analysis) but without the automatic legal protection that QM status provides. Non-QM lending has grown significantly in recent years, serving borrowers such as self-employed individuals using bank statement documentation, foreign nationals, and borrowers with recent credit events who do not fit within QM parameters.

Borrower’s Right of Action for ATR Violations

If a lender originates a loan without making a reasonable ATR determination, the borrower has a legal right of action. The borrower can bring a claim within three years of the violation occurring. Additionally, borrowers have a permanent defense of recoupment — meaning that in a foreclosure action, the borrower can raise the ATR violation as a defense against the foreclosure at any time, even beyond the three-year statute of limitations for affirmative claims. This recoupment defense can result in the reduction of the amount owed or other remedies .

The potential for borrower lawsuits and foreclosure defenses is what makes QM compliance so important to lenders. A QM loan’s safe harbor or rebuttable presumption significantly reduces the lender’s exposure to these claims.

Related topics include qualified mortgage (qm) rules explained, trid: tila-respa integrated disclosure rules, role of fannie mae and freddie mac in mortgage lending, and mortgage regulations: a borrower’s guide.

Key Factors

Factors relevant to The Ability-to-Repay (ATR) Rule
Factor Description Typical Range
Income Verification Method
QM vs. Non-QM Classification
Payment Calculation
Borrower Legal Remedies

Examples

Scenario: Standard QM loan with full ATR documentation
Outcome: The loan meets all QM criteria (standard documentation, DTI within guidelines, no prohibited features, points and fees within limits). The lender has ATR safe harbor protection. The loan is approved and closed with standard documentation.

Scenario: Non-QM bank statement loan with ATR compliance
Outcome: The loan does not meet QM criteria due to the rate spread. However, the lender has verified the borrower's income through bank statements, analyzed the DTI, verified employment and credit, and documented the full ATR analysis. The loan complies with ATR but lacks QM safe harbor protection. The lender retains extensive documentation.

Scenario: Pre-crisis stated-income loan (now prohibited by ATR)
Outcome: This type of lending is no longer permitted under the ATR rule. The lender must verify income through documentation. If the borrower's actual income were $60,000, the ATR analysis would reveal that the borrower cannot afford the proposed payment, and the loan should not be made.

Common Mistakes to Avoid

  • Confusing ATR with QM — assuming all loans must be QM-compliant
  • Assuming that bank statement or non-traditional documentation loans violate ATR
  • Not understanding the recoupment defense in foreclosure situations
  • Lenders using teaser rates instead of fully indexed rates for ATR analysis

Documents You May Need

  • Income documentation (tax returns, W-2s, pay stubs, bank statements, or other verification method)
  • Employment verification (employer letter, verbal VOE, or pay stub showing employer)
  • Credit report showing current debts and payment history
  • Property tax and insurance cost estimates
  • HOA dues documentation (if applicable)
  • Alimony and child support documentation (if applicable)
  • Loan terms showing monthly payment calculation at the fully indexed or contractual rate
  • DTI or residual income calculation worksheet

Frequently Asked Questions

What is the Ability-to-Repay rule?
The ATR rule is a federal requirement under Dodd-Frank that requires mortgage lenders to make a reasonable, good-faith determination that a borrower can repay a loan before originating it. The lender must verify eight specific underwriting factors including income, employment, debts, and credit history.
How is ATR different from QM?
ATR is the baseline requirement that applies to all residential mortgages. QM (Qualified Mortgage) is a specific category of loans that provides lenders with legal safe harbor for ATR compliance. All QM loans satisfy ATR, but non-QM loans must also satisfy ATR through independent verification.
Can I still get a stated-income loan?
No. The ATR rule eliminated stated-income lending for residential mortgages. All lenders must verify income through documentation. However, alternative verification methods like bank statements are available through non-QM programs.
What happens if a lender violates the ATR rule?
The borrower can bring a lawsuit within three years of the violation, seeking actual damages, statutory damages, and attorney fees. Additionally, the borrower has a permanent recoupment defense that can be raised in any foreclosure action at any time.
Does the ATR rule apply to all mortgages?
The ATR rule applies to most closed-end residential mortgage loans. Certain loans are exempt, including HELOCs (which are open-end), reverse mortgages, temporary bridge loans, and construction-only loans. Specific exemptions apply under the regulation.
Why do lenders prefer to make QM loans?
QM status provides legal protection against borrower lawsuits alleging ATR violations. Without QM protection, the lender bears significant legal risk that a borrower could challenge the loan. This risk makes non-QM lending more expensive and increases the documentation burden.
Are bank statement loans legal under ATR?
Yes. Bank statement loans use deposits as a proxy for income verification. As long as the lender analyzes the bank statements and makes a reasonable determination that the borrower can repay, the loan satisfies ATR. These loans are typically non-QM, so the lender does not receive QM safe harbor protection.
What is the recoupment defense?
Recoupment is a legal defense that allows a borrower facing foreclosure to raise an ATR violation as a defense against the foreclosure action. Unlike the three-year statute of limitations for affirmative claims, the recoupment defense is permanent and can be raised at any time during a foreclosure proceeding.
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