Uncategorized March 12, 2014

What to expect from the new Ability-to-Repay (ATR) Standards

Regulations going into effect in 2014 address what many people consider a primary cause of past problems in the mortgage market — “steering” borrowers to mortgages they could not afford.  In 2013, federal regulators issued Ability-to-Repay (ATR) Standards intended to ensure that borrowers can comfortably afford a home loan. The ATR Standards go into effect for loan applications received on or after January 10, 2014.

Borrowers should be aware that the new rules require lenders to collect and verify eight types of financial information from a potential borrower:

  1. Current income and assets
  2. Current employment status
  3. Credit history
  4. Monthly payment for the mortgage
  5. Monthly payments on other mortgage loans (second-lien loans made at the same time as the first-lien mortgage)
  6. Monthly payments for other housing-related expenses, such as property taxes, homeowner’s insurance and homeowner’s association fees
  7. Amounts paid on all other debts
  8. Monthly debt payments compared to monthly income, aka debt-to-income ratio

Taking all of this into consideration, the lender must determine that a borrower has sufficient income/assets and a debt-to-income ratio that would enable the borrower to comfortably afford their monthly mortgage payment.

Also significant to note is that the ability-to-repay calculations cannot be based on temporary rates. So, the ATR on adjustable-rate mortgages would be determined based on the highest possible monthly payment amount. The Consumer Financial Protection Bureau offers “What the new Ability-to-Repay rule means for consumers.” This six-page brochure is easy to read and explains ATR, as well as loans categorized as Qualified Mortgages that regulators presume are in compliance with the ATR Standard.