The Ability-to-Repay Rule: Possible Effects of
the Qualified Mortgage Definition on Credit
Availability and Other Selected Issues
Sean M. Hoskins
Analyst in Financial Economics
January 9, 2014
Congressional Research Service
7-5700
www.crs.gov
R43081
CRS Report for Congress
Pr
epared for Members and Committees of Congress

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The Ability-to-Repay Rule: Possible Effects

Summary
On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) released a final rule
implementing the Ability-to-Repay (ATR) requirement of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act). The rule is effective January 10, 2014. The ATR
rule will require a lender to determine based on documented and verified information that at the
time a mortgage loan is made, the borrower has the ability to repay the loan. Failure to make such
a determination could result in a lender having to pay damages to a borrower who brings a
lawsuit claiming that the lender did not follow the ATR rule.
The final rule provides multiple ways for a lender to comply, one of which is by originating a
Qualified Mortgage (QM). To receive QM status, a loan must meet certain underwriting and
product-feature requirements. For example, in most cases a QM cannot have a balloon payment (a
large payment that is typically due at the end of the loan). If a loan is a QM, then the lender
receives a presumption of compliance for legal purposes.
The type of presumption of compliance that a QM receives depends on the rate of the loan. If the
loan is a higher-priced mortgage (the mortgage’s rate exceeds the average rate for a prime
mortgage by more than 1.5 percentage points for a purchase), then the lender receives a
rebuttable presumption of compliance. It is presumed that the lender complied, but the borrower
could win his case if, for example, the court finds that the lender should have known that the
borrower did not have sufficient residual income after paying his mortgage and other obligations
to afford his living expenses. If the QM is not a higher-priced mortgage, then the lender receives
a safe harbor. So long as the mortgage meets the QM standards, the lender is considered to have
complied with the ATR rule.
Some are concerned that, at least in the short term, only mortgages meeting the QM standards
will be originated because of the legal protections they afford, even though there are other means
of complying with the ATR rule. The definition of QM, therefore, could determine who would
receive a mortgage in the future. To increase access to credit, the CFPB also included a temporary
QM option for loans eligible to be purchased by Fannie Mae and Freddie Mac or to be insured by
the government through the Federal Housing Administration (FHA), the Department of Veterans
Affairs (VA), the U.S. Department of Agriculture (USDA), or the Rural Housing Service (RHS).
According to the final rule, the temporary option would last for, at most, seven years from when
the rule goes into effect in January 2014.
The CFPB’s analysis of the mortgage market as of the end of 2011 concluded that, excluding the
temporary option, approximately 76% of mortgages would have received safe harbor QM status.
An additional 2% would have been qualified mortgages with a rebuttable presumption, and 22%
would have satisfied the ATR rule through other compliance options. Including the temporary
option, the CFPB estimates that more than 95% of the mortgage market as of the end of 2011
would have received QM status. Underwriting standards and access to credit are considered to
have been tighter in 2011 than before the housing crisis, however.
In addition to concerns about credit availability, experts have raised other potential issues with the
final rule. Some ask how the temporary QM option might affect the government’s role in the
housing market, while others raise concerns about the final rule’s impact on rural and community
banks. The ATR rule is one of several mortgage market rules released by regulators; some worry
about how the rules, in aggregate, will affect the mortgage market.
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The Ability-to-Repay Rule: Possible Effects

Contents
Introduction ...................................................................................................................................... 1
Background on the ATR Rule .......................................................................................................... 1
Description of Final Rule ................................................................................................................. 2
Compliance Options .................................................................................................................. 3
General ATR Option ............................................................................................................ 3
Standard Qualified Mortgage .............................................................................................. 4
Temporary Agency/GSE QM Option .................................................................................. 6
Balloon Mortgages in Rural or Underserved Areas ............................................................ 6
The Temporary Small Creditor Balloon-Payment QM ....................................................... 8
The Small Creditor QM ....................................................................................................... 9
Summary of Compliance Options ....................................................................................... 9
Exemptions .............................................................................................................................. 11
Streamlined Refinance of a Non-Standard Mortgage........................................................ 11
Certain Creditors and Lending Programs .......................................................................... 11
Possible Cost to Lenders ......................................................................................................... 12
Prepayment Penalties ............................................................................................................... 13
Effect on Credit Availability .......................................................................................................... 13
CFPB Estimates ....................................................................................................................... 13
Alternative Estimates ............................................................................................................... 15
CoreLogic .......................................................................................................................... 15
Amherst Securities ............................................................................................................ 16
Additional Selected Issues ............................................................................................................. 16
GSEs ........................................................................................................................................ 16
Rural Areas .............................................................................................................................. 17
Relationship to Other Rules ..................................................................................................... 18
Cap on Points and Fees ............................................................................................................ 18

Tables
Table 1. The Ability-to-Repay Compliance Options ..................................................................... 10

Contacts
Author Contact Information........................................................................................................... 19

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The Ability-to-Repay Rule: Possible Effects

Introduction
On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) released a final rule
implementing the Ability-to-Repay (ATR) requirement of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203).1 The final rule is effective January
10, 2014, one year after it was issued.
Section 1411 of the Dodd-Frank Act states that,
no creditor may make a residential mortgage loan unless the creditor makes a reasonable and
good faith determination based on verified and documented information that, at the time the
loan is consummated, the consumer has a reasonable ability to repay the loan, according to
its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and
assessments.
As discussed later in this report, lenders can comply with the statute in different ways, one of
which is by originating “qualified mortgages,” certain mortgages that meet criteria laid out in the
ATR rule. A qualified mortgage (QM) provides additional legal protections for a lender that the
other options do not afford. Some observers and mortgage market participants have expressed
concerns that, because of the additional legal protection, some lenders will only originate
mortgages that receive QM status.2 The scope of the QM definition, therefore, could affect who
can qualify for a mortgage.
This report summarizes the ATR rule and analyzes the potential effects it may have on the
mortgage market. The next section provides background information on the perceived problems
in the mortgage market that motivated the ATR requirement.
Background on the ATR Rule
When a potential borrower applies for a mortgage, a lender underwrites or evaluates the borrower
to determine whether a loan should be extended and on what terms. The underwriting process
typically involves the lender examining a borrower’s income, assets, credit history, and other
factors that may affect a lender’s ability to recover the amount loaned.
Some studies found that underwriting criteria loosened in the mid-2000s while house prices were
rising.3 In particular, some lenders accepted loan applications with little or no documentation to
support what was in the applications. Rather than relying on a borrower’s verified income or
assets to decide whether to extend a loan, some lenders relied on the underlying value of the
house to justify offering a mortgage, a process known as collateral-dependent lending.4 In a

1 Consumer Financial Protection Bureau, 78 Federal Register 6407, January 30, 2013.
2 CFPB, Prepared remarks of Richard Cordray at a meeting of the Credit Union National Association, February 27,
2013, at http://www.consumerfinance.gov/speeches/prepared-remarks-of-richard-cordray-at-a-meeting-of-the-credit-
union-national-association/.
3 For example, see Yuliya Demyanyk and Otto Van Hemert, Understanding the Subprime Mortgage Crisis, at
http://www.fdic.gov/bank/analytical/cfr/2008/mar/CFR_SS_2008_DemyanykHemert.pdf.
4 McKinley L. Blackburn and Todd Vermilyea, “The Prevalence and Impact of Misstated Incomes on Mortgage Loan
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mortgage, the borrower pledges the house as collateral; if the borrower is unable to repay the
mortgage, the lender can sell the house to recover some or all of the amount of the mortgage debt
outstanding. When house prices started to fall and the economy weakened in 2007, foreclosure
rates increased significantly, especially for loans with little or no documentation of borrower
income or assets.5
In response to increasing foreclosure rates, the Federal Reserve Board issued a rule in 2008 that
prohibited lenders from originating a “higher-priced mortgage” without assessing the borrower’s
ability to repay the loan and verifying the borrower’s income and assets.6 A first-lien mortgage
was deemed to be higher-priced if the annual percentage rate exceeded 1.5 percentage points
above the average prime offer rate, which is an estimate of the market mortgage rate based on a
survey of rates.7 When issuing the rule, the Federal Reserve noted that the “rule’s definition of
‘higher-priced mortgage loans’ will capture virtually all loans in the subprime market, but
generally exclude loans in the prime market.”8 The Federal Reserve’s 2008 ability-to-repay rule
enhanced the prior approaches to consumer protection that generally emphasized disclosure to
borrowers.
The ATR requirements in the Dodd-Frank Act are similar to the Federal Reserve’s 2008 rule but
expand the ATR requirements to a broader portion of the mortgage market, not just higher-priced
mortgages. The Federal Reserve issued the proposed rule implementing the Dodd-Frank Act’s
ATR requirements in 2011 before the authority to issue the final rule was transferred to the CFPB.
In issuing the final rule, the CFPB stated, “a primary goal of the statute was to prevent a repeat of
the deterioration of lending standards that contributed to the financial crisis.”9
The next section will explain the CFPB’s January 2013 final rule.
Description of Final Rule10
Prior to offering a borrower a mortgage that is subject to the rule, the ATR rule will require a
lender to determine, based on documented and verified information, that the borrower has the
ability to repay the loan.11 Failure to comply could result in a lender having to pay damages to a

(...continued)
Applications,” July 2010, at http://www.frbsf.org/economics/conferences/1007/blackburn_vermilyea.pdf. Collateral-
dependent lending was more prevalent with subprime and Alt-A loans than with prime mortgages.
5 Michael LaCour-Little and Jing Yang, “Taking the Lie Out of Liar Loans,” August 30, 2009, at http://www.fhfa.gov/
webfiles/15048/website_lacour.pdf.
6 Board of Governors of the Federal Reserve System, press release, July 14, 2008, at http://www.federalreserve.gov/
newsevents/press/bcreg/20080714a.htm.
7 The 1.5 percentage point threshold applies to first mortgages. For subordinate mortgages, the threshold is 3.5
percentage points. Board of Governors of the Federal Reserve System, press release, July 14, 2008, at
http://www.federalreserve.gov/newsevents/press/bcreg/20080714a.htm.
8 Board of Governors of the Federal Reserve System, press release, July 14, 2008, at http://www.federalreserve.gov/
newsevents/press/bcreg/20080714a.htm.
9 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6570, January 30, 2013.
10 The CFPB issued several final rules amending certain provisions of the ATR rule. This section describes the ATR
rule as of the date of this report’s publication.
11 The final rule does not apply to, among other things, “an open-end credit plan, credit secured by an interest in a
(continued...)
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borrower who brings a lawsuit and claims that the lender did not follow the ATR rule. The final
rule provides six methods for lenders to comply: (1) the General ATR Option, (2) the Standard
Qualified Mortgage, (3) the Temporary Agency/GSE QM Option, (4) Balloon Mortgages in Rural
or Underserved Areas, (5) the Temporary Small Creditor Balloon-Payment QM, and (6) the Small
Creditor QM. The different compliance options afford lenders different levels of protection in the
event that a borrower brings a lawsuit against a lender. In addition, lenders may be exempt from
the ATR rule in certain instances. The compliance options and exemptions are described below.
Compliance Options
General ATR Option
Lenders can satisfy the ATR rule through the General ATR Option. The General ATR Option
requires lenders to consider at least eight criteria:12
1. current or reasonably expected income or assets;
2. current employment status;
3. the monthly payment on the covered transaction;
4. the monthly payment on any simultaneous loan;
5. the monthly payment for mortgage-related obligations (e.g., taxes and insurance);
6. current debt obligations, alimony, and child support;
7. the monthly debt-to-income ratio or residual income; and
8. credit history.
Unlike the qualified mortgage compliance options described in the next sections, the General
ATR Option does not have restrictions on mortgage product features.
Lenders, in most cases, must verify the eight criteria using reasonably reliable third-party records,
such as a borrower’s tax return to verify income.13 The requirement that lenders verify the criteria
using third-party records “effectively prohibit(s) no documentation and limited documentation
loans that were common in the later years of the housing bubble.”14
If a borrower sues a lender claiming the lender did not verify the borrower’s ability to repay, the
“borrower will bear the burden of proof for establishing a violation.”15 Unlike the qualified
mortgage option described below, mortgages that comply with the rule through the General ATR

(...continued)
timeshare plan, reverse mortgage, or temporary loan.” CFPB, “Ability-to-Repay and Qualified Mortgage Standards
Under the Truth in Lending Act,” 78 Federal Register 6415, January 30, 2013.
12 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6408, January 30, 2013.
13 Exceptions to third-party records at CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in
Lending Act,” 78 Federal Register 6585, January 30, 2013.
14 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6555, January 30, 2013.
15 Ibid., p. 6564.
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Option will not provide the lender with a “presumption of compliance” in the event an action is
brought against it. Consequently, lenders could be exposed to additional legal risk if they
originate non-qualified mortgages.
Standard Qualified Mortgage
Rather than complying through the General ATR Option described above, a lender could also
comply by originating a “qualified mortgage.” A qualified mortgage must satisfy certain
underwriting and product-feature requirements. For underwriting requirements, the borrower’s
total debt-to-income (DTI) ratio cannot be greater than 43%.16 In addition, the borrower’s
monthly payment must “be calculated based on the highest payment that will apply in the first
five years of the loan.”17
With regard to product-feature restrictions, a QM cannot have18
• negative amortization—a borrower’s monthly payment does not cover the
amount of accrued interest so that the amount owed increases;
• interest-only payments—the
QM and QRM
borrower’s monthly payment is only
A Qualified Mortgage (QM) is one way to comply with
sufficient to cover the interest that
the ability-to-repay requirement. QM is sometimes
accrued and does not pay down any
confused with QRM, another component of the Dodd-
principal;
Frank Act. A Qualified Residential Mortgage (QRM) is an
exemption to Dodd-Frank’s Section 941 risk retention
• balloon payments—payments that are
requirements.
“more than two times a regular
Dodd-Frank required certain entities to retain part of
periodic payment,” often due at the end
the underlying credit risk of asset-backed securities,
of the mortgage;19
including mortgage-backed securities (MBS). If the
mortgages that compose an MBS satisfy the QRM
• terms exceeding 30 years; or
definition, then entities are exempt from retaining the
•
risk.
points and fees exceeding 3% of the
total loan amount, though there are
The standards for a QRM can be no broader than the
exceptions for smaller loan amounts.20
standards for a QM (if a loan would meet the QRM
standards then it would meet the QM standard, but the
The points and fees calculation
reverse would not necessarily be true). The six agencies
includes, among other things, the
writing the QRM rule released a proposed rule on April
compensation paid to the loan
29, 2011 and issued a notice revising the proposed rule
originator, some real estate-related fees
on August 28, 2013. Under the new proposal, the
paid to affiliates of the lender (for
definition for QRM would be aligned with the QM
definition.
example, for property appraisals),
premiums for some types of insurance
(such as credit property insurance), and prepayment penalties.21

16 Ibid., p. 6409. For how the DTI ratio is calculated, see Appendix Q of the final rule. The General ATR Option also
includes a monthly DTI component but does not prescribe a specific cut-off.
17 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6409, January 30, 2013.
18 Ibid.
19 Ibid., p. 6517.
20 Ibid., p. 6529.
21 CFPB, “Ability-to-Repay and Qualified Mortgage Rule Small Entity Compliance Guide,” pp. 32-35, at
(continued...)
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A lender that originates a QM is entitled to a “presumption of compliance” with the ATR
requirement, but the type of presumption of compliance and the amount of legal protection the
lender receives depends on the mortgage interest rate.
The CFPB will publish the average prime offer rate (APOR), an estimate of the market mortgage
rate based on a survey of rates. A QM with an annual percentage rate (APR)22 less than 1.5
percentage points above the APOR for a first lien or less than 3.5 percentage points above the
APOR for a subordinate lien23 qualifies for a safe harbor, a conclusive presumption of
compliance with the ATR requirement. Mortgages that qualify for a safe harbor are referred to by
the CFPB as prime mortgages.24 Mortgages above the thresholds that otherwise meet the QM
requirements are deemed to be “higher-priced covered transactions” and qualify for a rebuttable
presumption of compliance. The CFPB refers to QMs receiving a rebuttable presumption as
subprime loans.
Safe Harbor
A safe harbor QM has a conclusive presumption of compliance. If a borrower with a prime
mortgage sues a lender, the court would need to find that the mortgage is not actually a QM
because it fails to meet the necessary underwriting or product feature requirements for the
borrower to win his case. “If a court finds that the loan met the QM requirements and was not
higher-priced, the consumer would lose this claim.”25 Some lenders may choose to have a larger
percentage of their mortgages be prime mortgages to take advantage of the safe harbor.
Rebuttable Presumption
If a borrower has a mortgage that is higher-priced, the borrower could rebut the presumption that
the lender complied with the ATR rule. Similar to the safe harbor QM, a borrower could win his
case if the court finds that the mortgage was not actually a QM. In addition, if the mortgage is
otherwise a QM (meets the other underwriting and product feature requirements), the subprime
borrower could win his case if the court finds that “the creditor did not make a reasonable and
good faith determination of the consumer’s repayment ability at the time of consummation.”26
The borrower could win if, for example, the mortgage payment and other recurring payments that
the borrower must make and that the creditor was aware of (such as alimony or child support
payments) did not leave the borrower with sufficient residual income or assets to meet living
expenses.

(...continued)
http://files.consumerfinance.gov/f/201304_cfpb_compliance-guide_atr-qm-rule.pdf.
22 The APR is the annual cost of a loan, which includes the interest cost of the principal loan amount, insurance, and
other fees expressed as a percentage.
23 A first lien is said to be first because, in the event of foreclosure, the first lien is entitled to be repaid first and the
subordinate lien is paid second from the remaining amount of the foreclosure sale.
24 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6408, January 30, 2013.
25 CFPB, “Ability-to-Repay and Qualified Mortgage Rule Small Entity Compliance Guide,” p. 26, at
http://files.consumerfinance.gov/f/201304_cfpb_compliance-guide_atr-qm-rule.pdf.
26 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6587, January 30, 2013.
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The CFPB “determined that the bifurcated approach in which only higher-priced covered
transactions provide the consumer with the opportunity to rebut the presumption of compliance
best balances the concerns of costs, certainty, and consumer protection.”27
Temporary Agency/GSE QM Option
The CFPB is concerned that lenders may initially only originate mortgages that meet the QM
standards because “of the fragile state of the mortgage market as a result of the recent mortgage
crisis.”28 The CFPB final rule, therefore, establishes a Temporary Agency/GSE QM Option for
loans eligible to be purchased by Fannie Mae and Freddie Mac or to be insured by the
government through the Federal Housing Administration (FHA), the Department of Veterans
Affairs (VA), the U.S. Department of Agriculture (USDA), or the Rural Housing Service (RHS).
In addition to being eligible to be purchased or insured by those entities, a mortgage must also
satisfy product-feature requirements, such as the limitation on points and fees, to receive the
temporary QM status. The Temporary Agency/GSE QM option provides lenders with the same
bifurcated compliance protection as the Standard QM option: a prime borrower affords a lender a
safe harbor and a subprime borrower affords a lender a rebuttable presumption of compliance.
The different treatment of the DTI ratio between the Standard QM Option and the Temporary
Agency/GSE QM Option, some argue, could have a significant effect on credit availability. The
GSEs and agencies purchase mortgages that have DTI ratios above the standard option’s 43% cut-
off. Mortgages ineligible for the standard option, therefore, could still receive QM status through
the temporary option because of the less restrictive underwriting criteria used by the GSEs and
agencies.
The Temporary Agency/GSE QM option is not permanent. The temporary option for loans
eligible to be purchased by Fannie Mae and Freddie Mac will expire when Fannie Mae and
Freddie Mac are removed from conservatorship (or receivership, should the entities be placed into
receivership). The temporary QM option for loans insured by the government will expire on the
date that each agency’s own QM rule for mortgages that it insures becomes effective (if each
agency decides to issue its own QM rule).29 The temporary QM option would also expire if none
of those events occurs within seven years after the CFPB’s rule becomes effective (January
2021).30
Balloon Mortgages in Rural or Underserved Areas
The QM product-feature requirements described in the “Standard Qualified Mortgage” section
state that a QM cannot have a balloon payment. The CFPB final rule, however, establishes an
additional category of qualified mortgages for mortgages with balloon payments that are
originated by small creditors in rural or underserved areas. The CFPB estimates that
“approximately 10 percent of the U.S. population lives in areas that” the CFPB defines as rural or

27 Ibid., p. 6575.
28 Ibid., p. 6409.
29 HUD issued a final rule to define QM for FHA on December 11, 2013. For additional information, see 24 C.F.R. §§
201, 203, 1005, and 1007.
30 Ibid.
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underserved and that 2,707 lenders “will be able to originate balloon qualified mortgages as a
result of the provision.”31
To qualify for the balloon mortgage QM, the mortgage must meet certain lender-specific and
loan-specific requirements. The lender-specific criteria require a lender to32
• have less than or equal to $2 billion in assets;
• originate 500 or fewer mortgages in the previous year;
• make more than half of their covered transactions in counties that are rural33 or
underserved;34 and
• hold the mortgage for at least three years before selling it in order for the
mortgage to retain its QM status.35
In addition, the loan must36
• meet the QM requirement that a lender verify a borrower’s income, assets, and
debt obligations;
• have a term of between 5 years and 30 years;
• have a fixed interest rate;
• satisfy the QM requirement that the lender determine that the borrower can afford
all scheduled payments besides the balloon payment given the borrower’s income
and assets;
• not be subject to a forward commitment (an agreement to sell the loan) at the
time the loan is consummated; and
• not have negative amortization.
A balloon QM provides the lender the same protection as the general QM depending on whether
the mortgage is a higher-priced loan. Higher-priced mortgages afford a rebuttable presumption
and non-higher-priced mortgages provide the lender with a safe harbor. For small lenders,

31 Ibid., p. 6572.
32 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6556, January 30, 2013.
33A “county is considered to be rural if it is neither in a metropolitan statistical area, nor a micropolitan statistical area
adjacent to a metropolitan statistical area, as those terms are defined by the U.S. Office of Management and Budget.”
CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6618, January 30, 2013.The CFPB’s definition also relies on the USDA’s Urban Influence Codes (UICs).
34 “A county is considered to be underserved if no more than two creditors extend covered transactions secured by a
first lien five or more times in that county during a calendar year.” CFPB, “Ability-to-Repay and Qualified Mortgage
Standards Under the Truth in Lending Act,” 78 Federal Register 6618, January 30, 2013. The CFPB’s definition also
relies on the USDA’s Urban Influence Codes (UICs).
35 For exceptions, see CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,”
78 Federal Register 6618, January 30, 2013.
36 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6556, January 30, 2013.
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however, the threshold for safe harbor QM is increased to 3.5 percentage points above APOR
rather than 1.5 percentage points.37
Balloon mortgages are used by some lenders as a means of reducing the risk to which they are
exposed. In the 2011 ATR proposed rule, the Federal Reserve Board (the Board) stated,38
Based on outreach, it appears that some community banks make short-term balloon loans as
a means of hedging against interest rate risk, and that the community banks typically hold
these loans in portfolio. The Board believes Congress enacted this [category of QM] to
ensure access to credit in rural and underserved areas where consumers may be able to obtain
credit only from such community banks offering these balloon-payment loans.
Balloon mortgages help lenders hedge interest rate risk by passing some of the risk on to the
borrower. Interest rate risk for a lender is the risk that short-term interest rates could rise,
narrowing or eliminating the spread between the short-term rate at which a lender funds the
mortgage and the long-term rate that the lender earns on the mortgage. The wider the spread
between the short-term and long-term rates, the more the lenders can profit. When the balloon
payment on a balloon mortgage is due, the mortgage typically resets, adjusting to the market rate
at a certain point (often five or seven years after origination), or the borrower refinances the
mortgage at the current market rate. In both a rate reset and a refinance, some risk associated with
an increase in mortgage rates is assumed by the borrower.
Although balloon mortgages may help lenders hedge their risks, some view the large balloon
payment as potentially harmful or abusive to borrowers because borrowers may be unable to
refinance when the balloon payment is due or may face much higher payments after refinancing.
For example, the CFPB notes that “unscrupulous lenders may seek to take advantage of
consumers faced with the necessity of making a balloon payment by offering loans on predatory
terms.”39 To address these concerns, the final rule requires lenders to keep the balloon mortgage
on their books for three years (or sell it before then under limited circumstances). This
requirement could help better align the incentives of borrowers and lenders—lenders would not
want to originate mortgages that borrowers would be unable to repay if the lenders were holding
the mortgages and would bear some of the loss if the borrower defaults.
The Temporary Small Creditor Balloon-Payment QM
The CFPB established a two-year transition period for small lenders that do not operate
predominantly in rural or underserved areas. During the transition period, small lenders may offer
balloon mortgages that would receive qualified mortgage status so long as the mortgages are
retained in the lender’s portfolio and satisfy the requirements listed in the previous section. In the
transition period, the CFPB “intends to study whether the definitions of ‘rural’ or ‘underserved’

37 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” p. 5, at
http://files.consumerfinance.gov/f/201305_cfpb_final-rule_atr-concurrent-final-rule.pdf.
38 Board of Governors of the Federal Reserve System, at http://www.federalreserve.gov/newsevents/press/bcreg/
bcreg20110419a1.pdf.
39 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6537, January 30, 2013.
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should be adjusted and to work with small creditors to transition to other types of products, such
as adjustable-rate mortgages, that satisfy other qualified mortgage definitions.”40
The Small Creditor QM
The QM underwriting requirements described in the “Standard Qualified Mortgage” section state
that the borrower’s DTI cannot exceed 43% in order to receive QM status. The CFPB established
an additional category of QM for some mortgages in which the borrower’s DTI is greater than
43% and the loans are “originated and held in portfolio for at least three years (subject to certain
limited exceptions) by small creditors, even if they do not operate predominantly in rural or
underserved areas.”41 As is the case with small lenders making balloon mortgages, the threshold
for safe harbor QM is increased to 3.5 percentage points above APOR rather than 1.5 percentage
points.42
Summary of Compliance Options
Table 1 summarizes the compliance options described above.

40 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” p. 6, at
http://files.consumerfinance.gov/f/201305_cfpb_final-rule_atr-concurrent-final-rule.pdf.
41 Ibid., p. 5.
42 Ibid.
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Table 1. The Ability-to-Repay Compliance Options
Balloon
General
Standard
Temporary
Mortgage QM
Temporary
ATR
Qualified
Agency/GSE
in Rural and
Small Creditor Small Creditor
Balloon-
QM
Option
Mortgage
QM Option
Underserved
Payment QM

Areas
Loan Feature
No
No negative
No negative
No negative
No negative
No negative
Limitations
limitations
amortization,
amortization,
amortization or
amortization or
amortization,
interest-only,
interest-only, or
interest-only
interest-only
interest-only, or
or balloon
bal oon payments
payments
payments
bal oon payments
payments
Loan Term
No
30 years
30 years
No more than 30 No more than 30 30 years
Limit
limitations
years, no less
years, no less
than 5 years
than 5 years
Points & Fees
No
3% 3%
3% 3% 3%
Limit
limitations
Payment
Greater of
Maximum
As applicable, per
Amortization
Amortization
Max rate in first
Underwriting
fully indexed
interest rate in
GSE or agency
schedule no
schedule no
5 years
or
the first 5
requirements
more than 30
more than 30
introductory
years
years
years
rate
Mortgage-
Consider
Included in
As applicable, per
Included in
Included in
Included in
Related
and verify
underwriting
GSE or agency
underwriting
underwriting
underwriting
Obligations
monthly
requirements
monthly
monthly
monthly
paymenta and
paymenta and
paymenta and
paymenta and
DTIb
DTIb
DTIb
DTIb
Income or
Consider
Consider and
As applicable, per
Consider and
Consider and
Consider and
Assets
and verify
verify
GSE or agency
verify
verify
verify
requirements
Employment
Consider
Included in
As applicable, per
No specific
No specific
No specific
Status
and verify
underwriting
GSE or agency
requirement
requirement
requirement
DTI
requirements
Simultaneous
Consider
Included in
As applicable, per
Included in
Included in
Included in
Loans
and verify
underwriting
GSE or agency
underwriting DTI underwriting DTI underwriting DTI
DTI
requirements
Debt,
Consider
Consider and
As applicable, per
Consider and
Consider and
Consider and
Alimony, Child and verify
verify
GSE or agency
verify
verify
verify
Support
requirements
DTI or
Consider
DTI ≤ 43%
As applicable, per
Consider and
Consider and
Consider and
Residual
and verify
GSE or agency
verify
verify
verify
Income
requirements
Credit History
Consider
Included in
As applicable, per
No specific
No specific
No specific
and verify
underwriting
GSE or agency
requirement
requirement
requirement
DTI
requirements
Source: CFPB, at http://files.consumerfinance.gov/f/201308_cfpb_atr-and-qm-comparison-chart_V2_final.pdf.
a. “Included in underwriting monthly payment” means that the rule does not require the creditor to
separately consider and verify this factor. However, a creditor must consider and verify this factor when
underwriting the consumer’s monthly payment under the rule.
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b. “Included in underwriting monthly payment” means that the rule does not require the creditor to
separately consider and verify these factors. However, a creditor considers and verifies these factors when
determining whether the consumer’s debt-to-income ratio meets the 43% debt-to-income threshold.
Exemptions
Streamlined Refinance of a Non-Standard Mortgage
A lender is exempt from the requirement to verify the borrower’s repayment ability if the lender
is refinancing the borrower out of a non-standard mortgage and into a standard mortgage.43 A
non-standard mortgage is a mortgage that (1) has an adjustable interest rate “with an introductory
fixed interest rate for a period of one year or longer” (often referred to as a teaser rate); (2) is an
interest-only mortgage; or (3) is a negative amortization mortgage.44 A standard mortgage is
defined as a mortgage that, among other things, does not include a balloon payment, has limited
points and fees, does not exceed 40 years, and has a fixed rate for at least the first 5 years.
To be eligible for the exemption, the originator of the standard mortgage must be the “holder of
the existing nonstandard mortgage or the servicer acting on behalf of the current holder.”45 In
addition, the standard mortgage’s monthly payments must be less than the payments for the non-
standard mortgage. The final rule lists additional criteria that must be met.46
The exemption would allow for borrowers to receive a streamlined refinance from the holder of
their mortgage without requiring full documentation. Although “low or no doc” loans have
proven to be more risky, in this case the holder of the mortgage already bears the credit risk—the
risk of the borrower defaulting. Refinancing into a new mortgage with a lower monthly payment
could potentially reduce the borrower’s likelihood of default and therefore lower the risk faced by
the mortgage holder.
Certain Creditors and Lending Programs
The CFPB exempted certain creditors and lending programs from having to comply with the ATR
rule. Generally, the exempted creditors have received certifications or designations to be a part of
government programs that assist low-income and underserved communities, while the exempted
programs have a similar mission. Among the exempted lenders and programs are:
• Community Development Financial Institutions (CDFIs), which are lenders
approved by the Department of the Treasury that “provide financial products and
services, such as mortgage financing for homebuyers and not-for-profit
developers, underwriting and risk capital for community facilities; technical
assistance; and commercial loans and investments to small, start-up, or
expanding businesses”;47

43 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6487, January 30, 2013.
44 Ibid., p. 6537.
45 Ibid., p. 6586.
46 For additional parts of the definition, see CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the
Truth in Lending Act,” 78 Federal Register 6586, January 30, 2013.
47 For additional information on CDFIs, see CRS Report R42770, Community Development Financial Institutions
(continued...)
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• Community Housing Development Organizations (CDHOs), which are private,
non-profit organizations certified by the Department of Housing and Urban
Development (HUD) through its HOME Program to assist with the provision of
affordable housing for low and moderate income consumers;48
• Downpayment Assistance through Secondary Financing Providers (DAPs),
which are non-profit organizations approved by HUD to help borrowers finance
their downpayments;
• Certain nonprofits “that extend credit no more than 200 times annually, provide
credit only to low-to-moderate income consumers, and follow their own written
procedures to determine that consumers have a reasonable ability to repay their
loan”;49
• Housing Finance Agencies (HFAs), which are “state-chartered authorities
established to help meet the affordable housing needs of the residents of their
states”;50
• and certain programs authorized by the Emergency Economic Stabilization Act
(EESA) to assist homeowners, such as the Hardest Hit Fund program.51
The exemptions attempt to increase the credit available for low- and moderate-income borrowers,
though some argued that all creditors should be required to follow the ATR rule.52
Possible Cost to Lenders
The final rule states that “a consumer who brings a timely action against a creditor for a violation
of TILA section 129C(a) (the ability-to-repay requirements) may be able to recover special
statutory damages” if the violation is material.53 The statute of limitations generally is three years
from when the ATR rule was violated. However, if a lender attempts to foreclose on the borrower,
the borrower may assert a violation of the ATR rule “as a matter of defense by recoupment or
setoff” and there “is no time limit on the use of this defense.”54
As part of its analysis, the CFPB estimated the potential magnitude of damages that a borrower
could be awarded if the borrower has a non-qualified mortgage. For a borrower that wins its case
during the first three years after the loan is made outside the foreclosure context, the CFPB
estimates that the average borrower would be awarded approximately $29,200 while the average

(...continued)
(CDFI) Fund: Programs and Policy Issues, by Sean Lowry.
48 CRS Report R40118, An Overview of the HOME Investment Partnerships Program, by Katie Jones.
49 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” p. 4, at
http://files.consumerfinance.gov/f/201305_cfpb_final-rule_atr-concurrent-final-rule.pdf.
50 National Council of State Housing Agencies, at http://www.ncsha.org/about-hfas.
51 For more on the Hardest Hit Fund, see CRS Report R40210, Preserving Homeownership: Foreclosure Prevention
Initiatives, by Katie Jones.
52 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” p. 110, at
http://files.consumerfinance.gov/f/201305_cfpb_final-rule_atr-concurrent-final-rule.pdf.
53 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6416, January 30, 2013.
54 Ibid., p. 6504.
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estimated award for a borrower suing after three years in the foreclosure context would be
roughly $51,250.55 In addition, the CFPB estimates the lenders’ legal expenses to be
approximately $25,500, excluding the borrower’s award in a successful case.56 The CFPB
believes that the costs for non-qualified mortgages serve as a reasonable “upper bound for the
costs of” QMs.57 Economic theory predicts that lenders could pass some of the expected costs on
to borrowers in the form of higher borrowing costs.
Prepayment Penalties
The final rule also implements the Dodd-Frank Act’s prohibition on certain prepayment penalties.
A prepayment penalty is assessed against a borrower for paying all or part of a mortgage’s
principal before it is due. The final rule only permits a prepayment penalty on “a fixed-rate
mortgage that is a qualified mortgage and not a higher-priced mortgage” and only for the first
three years of the loan.58 The final rule also limits the size of the prepayment penalty that can be
imposed on eligible mortgages.
Effect on Credit Availability
Some observers and mortgage market participants have expressed concerns that lenders will only
originate mortgages that satisfy the safe harbor QM requirements even though there are
alternative methods of complying with the ATR rule.59 The scope of the QM definition, therefore,
could restrict who can qualify for a mortgage. This is an example of the general tradeoff between
consumer protection and credit availability. Attempts to ensure that the only borrowers who
receive mortgages are those who can repay the mortgage may result in some borrowers being
excluded who could actually have repaid their loan.
As part of its analysis of the final rule, the CFPB estimated the fraction of the mortgage market at
various points in time that would satisfy the ATR rule and receive the different types of QM
status. This section reviews the CFPB’s results and compares them to estimates by other
researchers.
CFPB Estimates
The CFPB estimated the fraction of the 1997-2003 mortgage market that would have been in
compliance with the ATR rule. The CFPB looked at the 1997-2003 period because, though it
“may not be perfectly representative of an ‘average’ market,” those “years span almost a full

55 Ibid., p. 6567.
56 Ibid., p. 6568.
57 Ibid., p. 6567.
58 Ibid., p. 6571.
59 CFPB, Prepared remarks of Richard Cordray at a meeting of the Credit Union National Association, February 27,
2013, at http://www.consumerfinance.gov/speeches/prepared-remarks-of-richard-cordray-at-a-meeting-of-the-credit-
union-national-association/.
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business cycle.”60 The CFPB also analyzed the mortgage market as of 2011. Underwriting
conditions change over time so analyzing different time periods may yield different results.
The CFPB analysis concluded that approximately 70% of mortgages originated between 1997 and
2003 would have received QM status even without including the temporary QM alternative for
GSE and government-insured loans. Of the 70%, the CFPB determined that most would have
been safe harbor QM and “perhaps one to four percent[age] points of these loans would have
been qualified mortgages subject to the rebuttable presumption.”61 An additional 22% would have
satisfied the ATR rule through the general ATR option (though not receive QM status) and the
final 8% would not have complied with the final rule.
The CFPB notes that, because of data limitations, it may have overestimated the percentage of
mortgages that would have received QM status because it did not have data on the mortgages’
points and fees. Some of the 70%, therefore, may not have qualified because of the 3% cap on
points and fees. The CFPB may also have underestimated the number receiving QM status
because it did not include those mortgages that would have qualified for rural balloon qualified
mortgages.
Using data from 2011, the CFPB estimated that “76 percent of mortgages would have been
qualified mortgages inside the safe harbor, 2 percent of mortgages would have been qualified
mortgages with a rebuttable presumption, and 22 percent of mortgages would have been subject
to the ability-to-repay requirements.”62 This implies that close to 100% of the 2011 mortgage
market would have been in compliance with the rule. As with the 1997-2003 period, the CFPB’s
estimate excludes the temporary QM option for GSE and government-insured loans. Also as
before, the CFPB’s estimates may be an overestimate due to the lack of data on points and fees
and an underestimate due to the exclusion of the rural QM option.
The CFPB analysis found that an additional 18% of mortgages as of the end of 2011 would
qualify for the temporary QM option.63 These mortgages may not qualify for the standard QM
option because their debt-to-income ratio exceeds 43% but they are still eligible to be purchased
by the GSEs or insured by a government agency. Including the temporary extensions, “over 95
percent of the market [would have been] granted qualified mortgage status.”64
According to analysis by the Congressional Budget Office (CBO), most of the newly originated
mortgages in each fiscal year since 2008 would have been eligible for the Temporary
Agency/GSE QM option (the sum of FHA, VA, RHS, Fannie Mae, and Freddie Mac).65 CBO
estimates that at least half of all newly originated mortgages would be eligible for the temporary
option until approximately FY2019.

60 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6558, January 30, 2013.
61 Ibid., p. 6565.
62 Ibid.
63 Ibid., p. 6569.
64 Ibid.
65 Congressional Budget Office, “Snapshot of Guarantees of New Residential Mortgages,” at http://www.cbo.gov/
publication/43986?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=812526&utm_campaign=0.
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The CFPB expects its final rule to both reduce future foreclosure rates and have a minimal effect
on access to credit. “Based on the experience of loans originated during the 1997-2003 period, the
Bureau estimates that roughly four percent of qualified mortgages loans will ever be 60 days
delinquent and less than one percent are expected to result in foreclosure.”66 The CFPB also
concludes that “the final rule will not lead to a significant reduction in consumers’ access to
consumer financial products and services, namely mortgage credit.”67 If credit is restricted for
some borrowers, the CFPB expects borrowers who would not have the ability to repay the loan to
be those primarily affected. The CFPB also notes that the requirement that creditors use verified
and documented information to assess a borrower’s ability to repay “may have a disproportionate
impact on access to credit for consumers with atypical financial characteristics, such as income
streams that are inconsistent over time or particularly difficult to document.”68 The CFPB’s
analysis, however, presumes that lenders will continue to offer loans to borrowers that would not
receive safe harbor QM status and that the mortgage market in the future will continue to be
similar to the 2011 and 1997-2003 mortgage markets that they studied.
Alternative Estimates
CoreLogic
CoreLogic, a provider of data and analysis on the mortgage market, analyzed 2.2 million
mortgages originated in 2010 to determine how many would have received QM status.69
CoreLogic expects the final rule to have a minor short-term impact on credit availability because
most new mortgages are guaranteed by the GSEs or a government agency and are eligible for the
Temporary Agency/GSE QM option. However, when “the exclusion expires ... it is estimated that
only 52 percent of originations will meet the eligibility requirements of the QM rule.”70
Jumbo loans may be most affected in the short term by the QM rule. Jumbo loans, loans that are
above the GSEs’ conforming loan limits,71 are ineligible to be purchased by the GSEs and,
therefore, cannot qualify for the temporary QM option. CoreLogic estimates that “more than 62
percent of total jumbo originations would meet the eligibility requirements of the QM rule.”72
Jumbo loans, according to CoreLogic’s estimates, make up 10% of the mortgage market.
CoreLogic’s analysis faces some of the same potential limitations as the CFPB’s estimates.
CoreLogic also did not include the points and fees cap in its analysis and did not discuss the rural
QM option.
CoreLogic may also misestimate the number of loans that may receive QM status in the future
because it uses the 2010 mortgage market as the basis of its forecast. CoreLogic estimates that, of
the 48% of mortgages that do not qualify for a safe harbor, 16 percentage points are due to

66 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6566, January 30, 2013.
67 Ibid., p. 6570.
68 Ibid., p. 6570.
69 Sam Khater, “The Mortgage Market Impact of Qualified Mortgage Regulation,” CoreLogic, February 12, 2013.
70 Ibid., p. 4.
71 CRS Report RS22172, The Conforming Loan Limit, by N. Eric Weiss and Sean M. Hoskins.
72 Sam Khater, “The Mortgage Market Impact of Qualified Mortgage Regulation,” CoreLogic, p. 5, February 12, 2013.
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insufficient documentation. However, CoreLogic notes that the “reason [the] low- or no-
documentation share is so high is due to the high number of refinances in the current
environment.”73 CoreLogic’s analysis does not attempt to account for potential changes in
stakeholders’ behavior as borrowers and lenders attempt to ensure that they comply with the ATR
rule. Some of the households that refinanced in 2010 with low or no documentation may have
been able to provide full documentation but chose not to because this was not required by their
lender or may have fallen under the refinancing exemption.
Amherst Securities
Amherst Securities, a broker-dealer specializing in mortgage-related investments, studied the
effect that the QM definition would have on jumbo loans if the rule had been in effect in 2012.74
Because jumbo loans are ineligible for the Temporary Agency/GSE QM option, they are among
the types of loans that may be most affected by the final rule. Amherst used data from jumbo loan
securitizations that were completed in 2012. The study found that 24% of the 4,020 loans in the
dataset would not receive QM status. Approximately 10 percentage points in the sample would
not have received QM status because they are above the 43% debt-to-income ratio. The remaining
14 percentage points had other characteristics that did not comply with the QM requirements,
such as interest-only payments or certain prepayment penalties. Amherst argues that the 14
percentage points of loans with interest-only or prepayment penalties “could have been QM with
minor adjustments.”75
Additional Selected Issues
In addition to affecting who may receive a mortgage, the ATR rule may have other effects on the
mortgage market. Some potential issues are described below.
GSEs
The ATR rule may also affect the GSEs. In its report, CoreLogic argues that the “irony of the
[Temporary Agency/GSE QM option] is that it reinforces the role that the GSE’s play in the
market, making it harder to enact GSE reform.”76 Offering QM status to loans that meet the
GSEs’ underwriting standards, some argue, reinforces the dominant role that the GSEs play in the
market. Others argue that the final rule may reduce some of the uncertainty that has prevented
private capital from entering the mortgage market and partially displacing the GSEs. Prior to the
release of the final rule, some argued that the regulatory uncertainty about what would be
included in the final rule may have been one of the factors that discouraged private capital from
entering the housing finance system.77 An analysis of the final rule by Deloitte argues that the
“rule may remove many of the uncertainties to the private-label securitization market and

73 Ibid., p. 4.
74 Laurie Goodman, Roger Ashworth, and Brian Landy, et al., QM: Mortgage Market Implications, Amherst Securities
Group LP, January 16, 2013.
75 Ibid., p. 5.
76 Sam Khater, “The Mortgage Market Impact of Qualified Mortgage Regulation,” CoreLogic, p. 3, February 12, 2013.
77 For example, see American Securitization Forum, “ASF Policy Proposals to Increase Private Capital in the U.S.
Housing Finance System,” April, 23, 2013.
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mortgage-backed securities.”78 While other factors may prevent private capital from returning,
finalizing the ATR rule may reduce one potential barrier.
In response to the final rule and as part of its effort to reduce the GSEs’ role in the housing
finance system, the regulator and conservator of the GSEs, the Federal Housing Finance Agency
(FHFA), announced that “it is directing Fannie Mae and Freddie Mac to limit their future
mortgage acquisitions to loans that meet the requirements for a qualified mortgage, including
those that meet the special or temporary qualified mortgage definition, and loans that are exempt
from the ‘ability to repay’ requirements.”79 To receive Temporary Agency/GSE QM status, a
mortgage must be eligible to be purchased by the GSEs or insured by the federal government and
the mortgage must also satisfy certain product-feature requirements. FHFA’s announcement,
essentially, aligns the GSEs’ standards with the standards for the Temporary Agency/GSE QM
Option listed in Table 1, especially for the first three rows. The GSEs, therefore, will not
purchase loans subject to the ATR rule if the mortgage is an interest-only loan, is negative
amortizing, has points and fees above the caps, or has a term longer than 30 years. The GSEs will
continue to purchase some mortgages that have DTI ratios above 43%.
Rural Areas
Similar to the Federal Reserve’s 2011 proposed rule, the CFPB based its definition of “rural” for
“Balloon Mortgages in Rural or Underserved Areas” off of the USDA’s Urban Influence Codes
(UICs). UICs are a way of classifying counties into 1 of 12 categories “depending on the size of
the largest city and town in the county.”80 The Federal Reserve proposed a relatively restrictive
definition of rural that would have included 4 of the 12 UICs and resulted in 2.3% of the U.S.
population (based on the 2000 census) deemed to be in a rural area.81 The CFPB’s final rule uses
a broader definition of rural that includes additional UIC categories and results in 9.7% of the
population included in rural areas.82 It is unclear for what fraction of the 9.7% of the population in
rural areas a rural lender is the only source for an affordable mortgage option.
Since the release of the final rule, some have called for the CFPB to use a more expansive
definition of rural. The Conference of State Bank Supervisors (CSBS), for example, suggests that
the CFPB not use a “nationwide rural classification system” but a “petition process whereby
interested parties can petition the CFPB to make a determination that a specified and bounded
area be considered rural.”83 Others would prefer the CFPB use the USDA’s Rural Housing Loan
program’s definition of rural which does not make classification decisions at the county level but
subdivides counties into rural and non-rural areas.84 The Rural Housing Loan definition would

78 Deloitte, “First Look: Implications of the ability-to-repay rule and the qualified mortgage definition,” p. 9, at
http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FSI/US_FSI_FirstLook_012413.pdf.
79 FHFA, “FHFA Limiting Fannie Mae and Freddie Mac Loan Purchases to “Qualified Mortgages”,” press release,
May 6, 2013, http://www.fhfa.gov/webfiles/25163/QMFINALrelease050613.pdf.
80 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6536, January 30, 2013.
81 Ibid.
82 Ibid., p. 6543.
83 Recommendation from John Ryan, president and CEO of Conference of State Bank Supervisors, to Richard Cordray,
CFPB director, March 26, 2013, at http://www.csbs.org/regulatory/policy/Documents/2013/
CSBSRuralPetitionRecommendation.pdf.
84 For example, see Robert T. Taylor, “How the Qualified Mortgage Rule Harms Rural Borrowers,” American Banker,
(continued...)
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result in 37% of the population classified as in a rural area with an average of 10 lenders per
area.85 The CFPB, however, believes “that a wholesale adoption of the Rural Housing Loan
definitions would therefore expand the definition of rural beyond the intent of the ... balloon-
payment qualified mortgage exemptions ... by incorporating areas in which there is robust access
to credit.”86 As mentioned previously, the CFPB has stated that it intends to study the definition of
rural that it has chosen and has established a two year transition period for small lenders who do
not operate in rural or underserved areas.
Relationship to Other Rules
The Ability-to-Repay rule is one of several mortgage market rules required by the Dodd-Frank
Act that were released by the CFPB in January 2013. Other rules, such as the Risk Retention and
Qualified Residential Mortgage rule87 and the rules related to the capital treatment of mortgage-
related assets held by banks under Basel III,88 are expected to be finalized by other agencies in the
near future. While some stakeholders may take issue with a particular rule, others raise concerns
about the potential aggregate effect (in terms of the effect on credit availability and in the
compliance burden) that the new rules will have on the mortgage market and whether regulators
are factoring these costs in to their rulemakings.89 For its part, the CFPB notes that it “is
coordinating carefully the Title XIV Rulemakings” (Title XIV refers to Title XIV of the Dodd-
Frank Act which required the rules).90 It is unclear, however, to what extend other regulators will
take the CFPB’s rulemakings into account when issuing their rules.
Cap on Points and Fees
To receive QM status, a loan must not have points and fees above the points-and-fees caps. For
loans above $100,000, the cap is 3% of the total loan amount. For loans less than $100,000, there
are different caps with each cap becoming higher as the loan total decreases so that loans less than
$12,500 can have points and fees up to 8%. The points and fees calculation includes, among other
things, the compensation paid to the loan originator, some real estate-related fees paid to affiliates
of the lender (e.g., for property appraisals), premiums for some types of insurance (such as credit
property insurance), and prepayment penalties.91
Points and fees are one way that lenders can earn a return on their loan, with the other being
through the interest rate. Capping the points and fees may incentivize lenders to earn more

(...continued)
January 23, 2013.
85 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6543, January 30, 2013.
86 Ibid.
87 CRS Report R42056, Ability to Repay, Risk-Retention Standards, and Mortgage Credit Access, by Darryl E. Getter.
88 CRS Report R42744, U.S. Implementation of the Basel Capital Regulatory Framework, by Darryl E. Getter.
89 Elizabeth Duke, Community Banks and Mortgage Lending, Board of Governors of the Federal Reserve System,
November 9, 2012, http://www.federalreserve.gov/newsevents/speech/duke20121109a.htm.
90 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6419, January 30, 2013.
91 CFPB, “Ability-to-Repay and Qualified Mortgage Rule Small Entity Compliance Guide,” pp. 32-35, at
http://files.consumerfinance.gov/f/201304_cfpb_compliance-guide_atr-qm-rule.pdf.
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through the interest rate rather than through upfront payments. The CFPB states that the cap on
points and fees may make lenders “take more care in originating a loan when more of the return
derives from performance over time (interest payments) rather [than] from upfront payments
(points and fees). As such, this provision [the cap on points and fees] may offer lenders more
incentive to underwrite these loans carefully.”92 Lenders hoping to receive safe harbor status for a
mortgage, however, may be limited in their ability to adjust the interest rate to account for the cap
on points and fees due to the 1.5 percentage point rate threshold between safe harbor and
rebuttable presumption.
Some argue that the caps are either too low or include too many types of fees, causing some loans
to not qualify for QM status that otherwise would.93 H.R. 1077, the Consumer Mortgage Choice
Act, removes some items from the calculation of points and fees. In so doing, the bill would make
it easier for mortgages to satisfy the cap on points and fees and, therefore, potentially receive QM
status. For example, the bill would exclude insurance paid in escrow from the definition of points
and fees (escrow for future payment of taxes is already excluded). The bill would also exclude
fees paid to affiliates of the lender, such as for title insurance (the fees to third parties unaffiliated
with the lender are already excluded), and exclude compensation paid by a lender to its employee
from the definition of points and fees.


Author Contact Information

Sean M. Hoskins

Analyst in Financial Economics
shoskins@crs.loc.gov, 7-8958




92 CFPB, “Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act,” 78 Federal Register
6562, January 30, 2013.
93 For example, see Mortgage Bankers Association, “Congress Should Exercise Diligent Oversight on the Ability to
Repay/ Qualified Mortgage Rule,” at http://www.mortgagebankers.org/files/AbilitytoRepayandQMLoans.pdf.
Congressional Research Service
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