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- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Mortgage ATR Rules/QM Rules
When you are planning to purchase a new home, one of the most challenging things is to qualify for a mortgage.
You would have to provide various documents to the lender to prove that you are qualified for the mortgage according to the qualified mortgage guidelines.
While the lenders qualify you, they have to follow certain rules.
One of the rules that the lenders have to follow is known as ATR/QM rule. In this post, we will learn what ATR rule / QM rule is in detail.
What Is The CFPB ATR/QM Rules?
In 2010, Congress enacted a major law called the Dodd-Frank Wall Street Reformed Consumer Protection Act, also referred to as the Dodd-Frank Act.
The Act amended the Truth in Lending Act of 1968 (TILA), which was also called Regulation Z.
Once enacted, the Dodd-Frank Act changed the financial system and put new government agencies in place to manage it. This act was enacted to regularize the mortgage lending process to avoid another financial crisis like in 2008.
Many provisions of this Act came into effect over the years. In particular, the ATR/QM rule effectively makes it more difficult for lenders to grant mortgages that are not in the best interest of the applicant.
It requires financial companies, individuals, or organizations to make a “good faith and reasonable determination” about a borrower’s ability to repay the mortgage as per their terms.
This qualification should be completed before the financial institution gives the residential mortgage loan to the borrower.
The QM/ATR rules also set precautions to charge pre-payment penalties and impose record-keeping for up to 3 years once the lender and the borrower sign the mortgage contract.
However, some provisions and plans, such as temporary GSE (Government-Sponsored Enterprise) QMs, which include loans sold by companies such as Freddie Mac or Fannie Mae, have changed over time.
How Do QM/ ATR Rules Protect The Borrowers?
When a financial institution makes a good-faith determination, the information must be verified by reliable sources by the financial institution.
This may include third parties with consistent and reliable reporting systems. Following the standard underwriting requirements for ATR policies will help the lenders to ensure that the borrower has the funds to repay the loan.
The assessment is based on at least eight factors, including expected or reasonable current income or assets, latest employment status and verified income, loan repayments, other loans on the same asset, an expense related to the current asset, other debts, a DTI, and credit. The financial institution may consider other measures if required.
The QM / ATR rules operate on legal confirmation that the issuers behind the qualified mortgage have complied with the requirements of the ability to repay rule. Therefore, it is assumed that the lender’s loan is legal.
Compliance with pricing and margin laws provides the lender with a conclusive presumption.
This acts as a legal defense for lenders if the borrower decides to file a lawsuit. In particular, it gives them some cover if consumers accuse them of not making the right good-faith determination.
While this gives the lender less leverage, it also protects the borrower. Non-QMM loans with high-interest rates do not benefit from this security.
Instead, QMs whose values are above a certain threshold come to the point of convergence.
This gives a borrower a strong argument that the borrower did not comply with the ATR criteria before providing the loan.
What Are The Types Of Loans Exempted from the QM/ ATR rules?
The QM / ATR rules apply to almost all home or residentially secured consumer loans.
However, there are some exceptions. Transactions that do not fall under this definition are not covered by this rule. As a borrower, you might come across these loan types.
A reverse mortgage taken against the home equity is a good example of a loan that falls outside of this rule.
Other exceptions are:
- short-term loans, which provide short-term financing,
- Some types of loan modification (and some types of mortgage refinancing),
- Timeshare
- Home equity lines of credit
- Construction loans with less than 12 months of tenure
- Vacant land consumer credit transactions.
Some odd homeowner loans that are converted into standard home loans are also exempted from this rule.
However, this only applies if you continue to hold the loan and it meets certain conditions after it is refinanced.
In addition, certain loans provided or provided by creditors or loan programs may be excluded under this rule.
Conclusion
The QM / ATR rules take measures to protect borrowers by pushing lenders to meet higher standards compared to what they used to be.
Also, the new update to the rule does this without compromising the ability to acquire appropriate credit for consumers.
It supports innovative and safe lending for borrowers. The law has gone through many twists and turns since Congress signed the Dodd-Frank Act.
Therefore, the future of many borrowers may be subject to future legal changes to this rule.
