Work out loan & ATR

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    I am going through loans we have originated this year to “test” the impact of the ATR requirements on our underwriting decisions in the future. I came across one and I’m not sure how we would handle this post January, 2014. The borrower had a HELOC (interest only) that matured. Her credit had deteriorated significantly and in this circumstance our policy is to close the line and term out the HELOC by refinancing it. The loan was handled by our special assets area as a “workout” as the borrower had been late several times. They refinanced the HELOC into a 15 year fixed rate loan, increasing her rate and her payment. Her DTI under the termed out loan is 63%. It also is a HPML.

    When this situation occurs after the ATR rules go into effect, I see signficiant risks in not having a QM with this type of borrower in this situation. My thought is that I’m going to need to instruct our Special Assets department on how to structure loans such as this to be a QM. (longer amortization may have been a better answer in this case as long as it was no more than 30 years). Please confirm I ‘m not missing something before I go “ratlling the cage” with Special Assets.


    1 – Will this type of “workout” be considered a refinance under the ATR rules?

    2 – Is there any exemption or special rule for workouts such as this? I saw the part of the rules dealing with “Scope” -1026.43(d)(2) – but I’m pretty sure they would not apply due to a number of factors (we increased her payment, she had been more than 1 time 30 days late and it was not in the required time frame for “recasting”).

    3- How should we handle the situation where we have a matured loan that we cannot structure in a way to originate a qualified mortgage? For instance, if we had a borrower we had amortized out for 30 years and they still exceeded the 43% threshold? Would we be better off to foreclose in this case than to originate a non-QM loan where the borrower can sue us under the ATR rules?



    1 – I agree, this transaction would not qualify for the refinance exception to 1026.43(c).
    2 – Unfortunately, there is no special rule exempting workouts from the ATR requirements.
    3- Although it would not work in the specific example you’ve given, consider that the ATR rules do not apply to modifications.

    CFPB ATR Small Entity Compliance Guide
    Click on this link, and see excerpts below:

    P. 12: The Truth in Lending Act applies to a loan modification only if it is considered a refinancing under Regulation Z. If a loan modification is not subject to the Truth in Lending Act, it is not subject to the ATR/QM rule. Therefore, you should determine if a loan modification is a refinancing to see if the ATR/QM rule applies. You will find the rules for determining whether a loan workout is a modification or a refinance in Regulation Z at § 1026.20(a) and accompanying Commentary.

    P. 44:
    The ATR/QM rule does not apply when you alter an existing loan without refinancing it. So you can provide a loan modification to a defaulted (or non-defaulted) consumer without complying with ATR. You can find a discussion of what changes to a loan will be treated as a modification rather than a refinancing in Regulation Z at § 1026.20(a).


    Keep in mind that there are seven ability to repay standards. The 43% DTI ratio appears in some but not all of the ATR options. for example under the Eight Factors there is no limit on the DTI% other than the bank’s own standards. I doubt that bank policy allows a debt-to-income ration of 63%.

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