What is the ability-to-repay rule? | Consumer Financial Protection Bureau (2024)

FAQs

What is the ability-to-repay rule? | Consumer Financial Protection Bureau? ›

The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good faith determination of a consumer's ability to repay a residential mortgage loan according to its terms.

Under the rule, lenders must generally find out, consider, and document a borrower's income, assets, employment, credit history, and monthly expenses. Lenders cannot just use an introductory or “teaser” rate to figure out if a borrower can repay a loan.

Factors considered in the ability to repay include the borrower's income, assets, employment status, liabilities, credit history, and the debt-to-income (DTI) ratio. As of early 2020, the Consumer Financial Protection Bureau (CFPB) was planning to eliminate the debt-to-income requirements.

The Dodd-Frank Act provides that “qualified mortgages” are entitled to a presumption that the creditor making the loan satisfied the ability-to- repay requirements. However, the Act did not specify whether the presumption of compliance is conclusive (i.e., creates a safe harbor) or is rebuttable.

Repayment ability rating (RAR) is a tool lenders use to measure a borrower's ability to repay a loan. It takes into account the borrower's current income, debts, and assets. The higher the RAR, the more likely the borrower is able to repay the loan on time.

In consumer credit, “ability-to-pay” (ATP) rules require lenders to consider whether the consumer can repay a loan without experiencing undue hardship.

Capacity

Capacity refers to your ability to repay loans. Lenders can check your capacity by looking at how much debt you have and comparing it to how much income you earn. This is known as your debt-to-income (DTI) ratio.

Multiply your monthly income by 12 to get your annual gross income. 3. Divide your annual debt payments by your annual gross income: This will give you your debt service ratio. The lower the ratio, the better your repayment ability.

Some bankers judge a borrower's capacity using the standard Five C's of Credit – credit history, capital base, capacity to generate cash flow, collateral, and current conditions in the economy.

Debt-to-EBITDA ratio: This ratio is calculated by dividing your company's total debt by its earnings before interest, taxes, depreciation and amortization (EBITDA) . Debit-to-income ratio : This is the formula used by lenders to determine a client's ability to pay off a loan given the amount of money they already owe.

What is the ability to repay disclosure? ›

Under the ATR Rule, mortgage lenders must make a reasonable and good faith determination, based on documented and verified information, that a borrower has a reasonable ability to repay a residential mortgage loan.

Data Collection and Reporting

The financial institutions covered under the Final Rule are required to compile and maintain data from small business loan applications. Specifically, there are 81 data points that these institutions must collect and submit to the CFPB, and a list of these data points can be found here.

On October 10, 2019, the OCC issued another final rule, implementing changes made by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which revised the minimum threshold for stress testing to $250 billion, modified the frequency of company-run stress tests for certain national banks and federal ...

The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good faith determination of a consumer's ability to repay a residential mortgage loan according to its terms.

Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.

DEFINITIONS The capital debt repayment capacity margin is computed by subtracting interest expense on term debt, principal on term debt and capital leases, and unpaid operating debt from prior periods from capital debt repayment capacity.

§226.51: Ability to Pay

The CARD Act prohibits card issuers from opening a credit card account or increasing the credit limit of an existing account without considering the consumer's ability to make the required payments.

Section 1026.51(a) requires a card issuer to consider a consumer's ability to make the required minimum periodic payments under the terms of an account based on the consumer's income or assets and current obligations.

The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good faith determination of a consumer's ability to repay a residential mortgage loan according to its terms.

The 7-in-7 rule explained

Collectors are permitted to place a call to the consumer about a particular debt seven (7) times within a period of seven (7) consecutive days, so long as no contact is made with the consumer in any of the attempts.