Ability-to-Repay and Qualified Mortgage Rule: Protections and Remedies

The Ability-to-Repay and Qualified Mortgage Rule is a federal Consumer Financial Protection Bureau regulation that requires every mortgage lender to make a reasonable, good-faith determination that you can actually afford a home loan before approving it.¹ It sets baseline underwriting standards that apply to nearly all residential mortgages, and it creates a higher tier called a Qualified Mortgage that bans the loan features most associated with the 2008 crisis and gives lenders legal protection when they follow the stricter rules.

What Your Lender Must Verify Before Approving You

Federal law treats eight financial factors as mandatory checkpoints. A lender has to evaluate all of them, and skipping any of them exposes the lender to serious liability.² The factors, drawn directly from 12 CFR 1026.43(c), are:³

Your current or reasonably expected income or assets, not counting the value of the home securing the loan
Your employment status, if the lender is relying on employment income
The projected monthly payment on the mortgage you’re applying for
The monthly payment on any simultaneous loan the lender knows will be secured by the same property
Property-related costs like taxes, insurance, and other recurring charges
Your existing debt obligations, including alimony and child support
Your debt-to-income ratio, or the residual income you have left after paying debts
Your credit history

A bank can’t approve you based on one strong factor while ignoring another. Strong credit doesn’t excuse debts that already consume most of your paycheck.

Just as important, the rule forbids lenders from taking your word about any of this. Every financial claim on the application must be verified through third-party records, which is what ended the “stated income” and “no-doc” lending that fueled the crisis. For an adjustable-rate mortgage, the lender must underwrite the loan using the maximum interest rate that could apply during the first five years, not the teaser rate. That single requirement prevents borrowers from qualifying at rates they could never sustain once the loan resets.

What Makes a Loan a Qualified Mortgage

Not every compliant loan is a Qualified Mortgage. The QM label is a higher standard that sits on top of the baseline ATR check. Lenders pursue it because a QM gives them a legal presumption that they followed the rules. For you, a QM means the loan lacks the structural traps that made pre-crisis mortgages dangerous.

Price-Based Qualification

Since 2021, whether a loan qualifies as a General QM depends primarily on its price. The loan’s annual percentage rate cannot exceed the Average Prime Offer Rate (APOR) for a comparable loan by 2.25 percentage points or more for a first-lien mortgage.⁴ This price cap replaced an earlier rule that drew a hard line at a 43 percent debt-to-income ratio. The logic: lenders price risk into the interest rate, so a loan priced well above market signals that the borrower may be stretched too thin.

Caps on Points and Fees

A Qualified Mortgage also caps the upfront costs a lender can charge. The limits are tiered by loan size:⁵

Loans of $100,000 or more: 3 percent of the loan amount
$60,000 to $100,000: $3,000
$20,000 to $60,000: 5 percent of the loan amount
$12,500 to $20,000: $1,000
$12,500 or less: 8 percent of the loan amount

The CFPB adjusts the dollar thresholds annually for inflation, so exact cutoffs shift year to year. The structure stays the same: smaller loans get more room as a percentage because fixed closing costs hit them disproportionately hard.

Banned Loan Features

Certain structures disqualify a mortgage from QM status entirely because they sat at the center of the pre-crisis collapse.⁶ Negative amortization is out. So are interest-only periods, where your payment doesn’t reduce the principal and then jumps sharply when the phase ends. Loan terms longer than 30 years don’t qualify. Balloon payments generally don’t either, though small lenders serving rural areas can still offer balloon-payment QMs under limited circumstances.

Prepayment Penalty Limits

Prepayment penalties are allowed on a QM only under narrow conditions. The loan must carry a fixed rate and must not be classified as higher-priced. Even then, penalties are capped at 2 percent of the prepaid balance in the first two years, 1 percent in the third year, and zero after that.³ If a lender offers a loan with a prepayment penalty, it must also offer you a comparable loan without one. Higher-priced QMs cannot include prepayment penalties at all.

Two Levels of Legal Protection

The protection a lender gets from making a QM depends on how the loan is priced relative to the market. A first-lien QM with an APR less than 1.5 percentage points above APOR earns a “safe harbor,” a conclusive legal presumption that the lender complied with the ATR rule.⁷ A borrower essentially cannot challenge a safe harbor loan on ATR grounds.

A first-lien QM with an APR between 1.5 and 2.25 percentage points above APOR still counts as a QM but only earns a “rebuttable presumption.” You can overcome that presumption by showing the lender should have known you couldn’t afford the loan based on the information available at the time. For subordinate-lien mortgages, the threshold is 3.5 percentage points above APOR instead of 1.5.⁷ The practical result: lenders chase safe harbor status for most loans, which keeps pricing competitive.

Other Qualified Mortgage Pathways

The General QM described above covers most conventional loans. The rule creates a few additional routes for specific lenders and programs.

Small Creditor QMs

Community banks and credit unions that hold fewer than 2,000 first-lien mortgages per year and stay below roughly $2.8 billion in assets get some flexibility. These small creditors can issue QMs with balloon payments and may hold loans in their own portfolio rather than selling them to the secondary market. The reasoning is that a small lender keeping the loan on its own books has a built-in incentive to underwrite carefully. The CFPB adjusts the asset threshold annually.

Seasoned QMs

A loan that doesn’t initially qualify as a QM can earn that status after 36 months of strong performance, provided the lender holds it in portfolio for the whole seasoning period.⁸ During those 36 months, the loan can have no more than two late payments of 30 days or more, and zero late payments of 60 days or more.⁷ Only first-lien, fixed-rate loans are eligible.

Agency QMs

Loans insured or guaranteed by the FHA, VA, or USDA qualify as QMs under their respective agency rules. Each agency sets its own underwriting standards. VA loans, for example, emphasize residual income over debt-to-income ratio, measuring whether you have enough cash left each month to cover basic living expenses after paying all debts and the mortgage. Agency QMs carry the same legal presumption of compliance as a General QM.

Loans the Rule Doesn’t Cover

Some mortgage products fall outside the ATR requirement entirely. Home equity lines of credit are governed by a different section of the regulation, though a lender cannot dress a loan up as a HELOC just to dodge the rule. Reverse mortgages are exempt because borrowers don’t make monthly payments. Bridge loans of 12 months or less, the initial construction phase of a construction-to-permanent loan, timeshare loans, and loans secured by vacant land are also exempt. These exemptions come from 12 CFR 1026.43(a).³ A standard purchase mortgage or refinance is covered.

What You Can Do if a Lender Violates the Rule

If a lender approves a mortgage without properly evaluating your ability to repay, you can sue to recover the total of all finance charges and fees you paid on the loan, unless the lender proves the failure was immaterial.⁹ On a typical 30-year mortgage, finance charges can easily exceed the original loan amount, so this is not a token penalty. The court can also award attorney’s fees and litigation costs on top.

You have three years from the date of the violation to bring an offensive claim.⁹ But there’s an important exception. If the lender or whoever holds your loan tries to foreclose, you can raise the ATR violation as a defense with no time limit. This recoupment right means the violation can follow the loan for its entire life, which gives the lender a strong incentive to get the underwriting right the first time.

1
Consumer Financial Protection Bureau. Ability-to-Repay/Qualified Mortgage Rule
2
Office of the Law Revision Counsel. 15 USC 1639c – Minimum Standards for Residential Mortgage Loans
3
eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling
4
Consumer Financial Protection Bureau. Consumer Financial Protection Bureau Issues Two Final Rules to Promote Access to Responsible, Affordable Mortgage Credit
5
Consumer Financial Protection Bureau. My Lender Says It Can’t Lend to Me Because of a Limit on Points and Fees on Loans. Is This True?
6
Consumer Financial Protection Bureau. What is a Qualified Mortgage
7
Federal Register. Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): Seasoned QM Loan Definition
8
Consumer Financial Protection Bureau. Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): Seasoned QM Loan Definition
9
Office of the Law Revision Counsel. 15 USC 1640 – Civil Liability