United States

Ability to Repay and Qualified Mortgage Standards Regulation Z


When is the final rule effective?

Jan. 10, 2014

Which loans are affected by the rule?

Any consumer credit transaction secured by a dwelling, except as listed below.

Which loans are specifically excluded by the rule?

The Ability to Repay Rule excludes open-end credit plans, timeshare plans, reverse mortgages and temporary loans.

Qualified Mortgages (QMs) exclude loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. "No documentation" loans where the creditor does not verify income or assets also cannot be QMs. In addition, a loan generally cannot be a QM if the points and fees paid by the consumer exceed three percent of the total loan amount, although certain bona fide discount points are excluded for prime loans.

What does a financial institution need to consider when applying the new rule to its procedures?

1. Lenders must make the determination if the borrower can repay the loan by looking at the borrower's income and any assets, by performing the following:

  • Consider 8 minimum underwriting factors of: (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; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history.
  • Lenders must generally use reasonably reliable third-party records to verify the information they use to evaluate the 8 factors.
  • Lenders are required to retain evidence for 3 years after the loan is consummated.

2. Financial Institutions may wish to set criteria in order for loans to meet QM requirements and therefore are presumed to meet the Ability to Repay rule requirements. The criteria required to meet QM requirements includes:

  • Debt to income cannot exceed 43 percent (calculated using the highest monthly payment that could apply in the first 5 years of the loan).
  • No prepayment penalties except for certain fixed-rate QMs where the penalties satisfy certain restrictions and the creditor has offered the consumer an alternative loan without such penalties.
  • The transaction's total points and fees do not exceed:
    • (A) For a loan amount greater than or equal to $100,000: 3 percent of the total loan amount
    • (B) For a loan amount greater than or equal to $60,000 but less than $100,000: $3,000
    • (C) For a loan amount greater than or equal to $20,000 but less than $60,000: 5 percent of the total loan amount
    • (D) For a loan amount greater than or equal to $12,500 but less than $20,000: $1,000
    • (E) For a loan amount less than $12,500: 8 percent of the total loan amount
  • Loan cannot have balloon payment, except those made by smaller creditors in rural or underserved areas (see bullet point below) and loan terms cannot exceed 30 years.
  • The final rule also implements a special provision in the Dodd-Frank Act that would treat certain balloon-payment loans as QMs if they are originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. Loans are only eligible if they have a term of at least five years, a fixed-interest rate, and meet certain basic underwriting standards; debt-to-income ratios must be considered but are not subject to the 43 percent general requirement. Creditors are only eligible to make rural balloon-payment qualified mortgages if they originate at least 50 percent of their first-lien mortgages in counties that are rural or underserved, have less than $2 billion in assets, and (along with their affiliates) originate no more than 500 first-lien mortgages per year. Creditors must generally hold the loans on their portfolios for three years in order to maintain their "qualified mortgage" status.
  • Provides a second, temporary category of QMs that have more flexible underwriting requirements so long as they satisfy the general product feature prerequisites for a QM and also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by the GSEs while they operate under Federal conservatorship or receivership; or the U.S. Department of Housing and Urban Development, Department of Veterans Affairs, or Department of Agriculture or Rural Housing Serv

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Kelly Housh
Regulatory Compliance National Support
Minneapolis, MN


Ty Beasley
Regulatory Compliance National Leader
Dallas, TX