12 CFR 1026 43 Refinancing Non Standard Mortgages

Updated 2026-05-17

The Ability-to-Repay (ATR) Rule and Qualified Mortgage (QM) standards are core components of Regulation Z (12 CFR § 1026.43), which implements the Truth in Lending Act (TILA). Mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (specifically Title XIV, the Mortgage Reform and Anti-Predatory Lending Act) and issued by the CFPB in 2013, these rules generally require creditors to make a reasonable and good faith determination that a consumer has a reasonable ability to repay any residential mortgage loan before extending credit.

These rules apply to most closed-end consumer credit transactions secured by a dwelling, known as "covered transactions," and aim to prevent lenders from originating loans that consumers cannot afford. This protects consumers from predatory lending and promotes market stability and responsible lending practices.

Scope and Covered Transactions (12 CFR § 1026.43(a))

A covered transaction refers to a consumer credit transaction that is secured by a dwelling, commonly known as a mortgage loan. The ATR/QM rule generally applies to most residential mortgage loans. The definition of a covered transaction is fundamental to understanding the scope of the Ability to Repay Rule and related provisions, including the criteria for small creditors and rural or underserved areas.

Exemptions from ATR/QM Requirements

Certain transactions, creditors, or loan programs are exempt from the ATR/QM requirements of 12 CFR 1026.43. An exempt loan remains exempt even if it is sold, assigned, or transferred to a creditor that would not otherwise qualify for the exemption.

Exempt Loan Types

The following loan types are generally exempt from ATR/QM requirements:

• Open-end credit plans: Such as Home Equity Line of Credit (HELOC)s.
• Timeshare plans.
• Reverse Mortgage Loans (HECM and Home Keeper)s.
• Temporary or "bridge" loans: With terms of 12 months or less, including construction loans.
• Loans secured by vacant land.

Exempt Creditor Types or Programs

Certain creditors or programs are also exempt from ATR requirements:

• Housing Finance Agencies (HFAs): Extensions of credit made pursuant to a program administered by an HFA, such as the Department of Veterans Affairs (VA), regardless of funding source. This exemption extends to intermediaries (e.g., private creditors) extending credit under such programs.
• Community Development Financial Institutions (CDFIs): Creditors designated by the U.S. Department of the Treasury as CDFIs.
• HUD-designated Organizations: Creditors designated by the U.S. Department of Housing and Urban Development (HUD) as either a Community Housing Development Organization or a Downpayment Assistance Provider of Secondary Financing, under certain conditions.
• 501(c)(3) Nonprofit Organizations: Creditors designated as nonprofit organizations under section 501(c)(3) of the Internal Revenue Code of 1986 that extend credit.
• Emergency Economic Stabilization Act Programs: Extensions of credit made pursuant to programs like a State Hardest Hit Fund program.
• Small Creditors: Under certain conditions, including limitations on the number of covered transactions originated and serving low- and moderate-income households. Refer to Small Creditor Definition and Rural/Underserved Area Provisions (Regulation Z) for specific criteria.

Ability-to-Repay (ATR) Rule (12 CFR § 1026.43(c))

The ATR Rule requires creditors to make a reasonable and good faith determination that the consumer has a reasonable ability to repay the loan according to its terms before consummating a mortgage loan. This determination must be based on information that is reasonably available to the creditor at the time the loan is consummated.

Underwriting Factors for ATR Determination

To comply with the ATR Rule, lenders must consider at least eight specific underwriting factors, based on information known at the time of consummation. These factors must generally be verified using reasonably reliable third-party records. While the rule sets these minimum requirements, it does not dictate specific underwriting models.

The eight mandatory underwriting factors are:

1. Current or reasonably expected income or assets: Excluding the value of the dwelling that secures the loan. This includes income from employment, self-employment, or other verifiable sources, as well as liquid assets that can be used to make payments.
2. Current employment status: If the creditor relies on income from employment, verification of the borrower's employment stability and history.
3. Monthly payment for the covered transaction: Calculated using the fully indexed rate or introductory rate, whichever is higher, and fully amortizing payments. This is the principal and interest payment for the new mortgage loan.
4. Monthly payment for any simultaneous loans: Secured by the same dwelling, such as a second mortgage.
5. Monthly payment for mortgage-related obligations: Including property taxes, hazard insurance, flood insurance (if applicable), mortgage insurance premiums, and homeowners association (HOA) dues.
6. Current debt obligations: Alimony, child support, and other debt payments, including credit cards, auto loans, student loans, and any court-ordered payments.
7. Monthly VA-Approved Credit Underwriter and Underwriting Standards (DTI) or residual income: Calculated using the total of all debt obligations and income, or the income remaining after all essential expenses and debts are paid.
8. Credit history: The consumer's credit report and other relevant credit information, evaluating the borrower's past borrowing and repayment behavior.

Qualified Mortgages (QMs) (12 CFR § 1026.43(e))

A Qualified Mortgage (QM) is a category of residential mortgage loans that meets specific requirements designed to ensure that the borrower has the Ability to Repay (ATR) the loan. The QM rule was established under Regulation Z (12 CFR § 1026.43(e)) as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (Title XIV, the Mortgage Reform and Anti-Predatory Lending Act). It is a crucial concept for Mortgage Loan Originators (MLOs) as it defines a standard for responsible lending and the associated legal protections for lenders.

The QM rule, part of the 2014-mortgage-rules, is implemented by the Bureau of Consumer Financial Protection (CFPB) through Regulation Z (12 CFR 1026), specifically 12 CFR § 1026.43(e), which amends the Truth in Lending Act (TILA). Its purpose is to protect consumers from irresponsible lending practices by ensuring that creditors make a reasonable, good-faith determination of a consumer's ability to repay a mortgage loan.

Presumption of Compliance

QM loans are presumed to comply with the Ability to Repay (ATR) rule. This provides a legal safe harbor or rebuttable presumption of compliance for creditors, offering protection from liability if a borrower later claims they could not afford the loan. This presumption makes it more difficult for consumers to challenge the creditor's ATR determination.

Specifically, QMs receive certain protections from liability under the ATR requirements:

• Conclusive Presumption (Safe Harbor): Applies to QMs that are not Higher-Priced Mortgage Loans (HPMLs). This provides a conclusive presumption that the creditor satisfied the ATR requirements and is difficult for a consumer to challenge. When a loan receives safe harbor status, it means that a consumer cannot successfully challenge the creditor's determination of their ability to repay, even if the consumer later claims they could not afford the loan. The creditor is conclusively presumed to have complied with the ATR rule.
• Rebuttable Presumption: Applies to QMs that are HPMLs. A consumer can challenge this presumption by demonstrating that, despite meeting QM criteria, the creditor did not make a reasonable and good faith determination of the consumer's ability to repay the loan based on the information available to the creditor at the time the loan was originated.

The difference between a loan's APR and APOR determines whether a QM receives a conclusive or rebuttable presumption of compliance with the ATR requirement. 12 CFR § 1026.43(e)(1).

Lenders selling loans to Government Sponsored Enterprise (GSE) or Government Sponsored Enterprise (GSE) are responsible for demonstrating compliance with ATR requirements.

General QM Definition

The General Qualified Mortgage (QM) definition is a category of QM loans established by the CFPB under Regulation Z (12 CFR 1026). Loans meeting this definition are presumed to comply with the ATR Rule, offering lenders significant legal protection. The definition has evolved over time, transitioning from a primarily debt-to-income (DTI)-based standard to a price-based standard.

Evolution of the General QM Definition

Original DTI-Based Definition (Phased Out)

The original General QM Loan Definition was primarily debt-to-income (DTI)-based.

• DTI Limit: A loan generally qualified if the borrower's total monthly Debt to Income ratio did not exceed 43%. Creditors were required to calculate and verify this DTI ratio.
• Points and Fees Cap: The loan also had to meet specific limits on points and fees.
• Loan Features: Prohibited certain risky loan features, such as interest-only payments, negative amortization, and terms exceeding 30 years.

This DTI-based definition was phased out by amendments issued by the CFPB in April 2021. For applications received between March 1, 2021, and October 1, 2022, creditors had the option to comply with either the original DTI-based definition or the revised price-based definition. As of October 1, 2022, the original DTI-based General QM loan definition is no longer available for new applications.

Revised Price-Based Definition (Current - 12 CFR 1026.43(e)(2))

The revised General QM Loan Definition is primarily price-based, relying on the loan's APR relative to the APOR to determine QM status. This definition became effective March 1, 2021, and mandatory for new applications after October 1, 2022.

Key features of a General QM under the revised definition include:

• Payment Structure: Provides for regular periodic payments that are substantially equal (except for adjustable-rate or step-rate mortgages) and do not:
  • Result in an increase of the principal balance (no negative amortization).
  • Allow the consumer to defer repayment of principal (no interest-only payments), except as provided for balloon-payment QMs.
  • Result in a balloon payment, except as provided for Balloon Payment (QMS) made by certain creditors.
• Loan Term: Does not exceed 30 years.
• Points and Fees: Subject to limits on total points and fees.
• Creditworthiness: The consumer has made no more than one payment more than 30 days late on a non-standard mortgage during the 12 months immediately preceding the application for a standard mortgage, and no payments more than 30 days late during the six months immediately preceding the application.
• No "Toxic Features": Prohibits features like negative amortization or interest-only payments, with exceptions for certain balloon QMs.
• Underwriting Standards: The creditor must consider and verify the consumer's income and assets, and assess their debt obligations. This includes underwriting the loan based on fully amortizing payments, considering the maximum interest rate that may apply during the first five years of the loan term. Creditors must have considered and verified the consumer's 12 CFR 1026 43 Ability to Repay using the eight underwriting factors.
• APR vs. APOR Spread (Price-Based QM): For a loan to satisfy the revised General QM definition, its APR cannot exceed the APOR for a comparable transaction by specific amounts set forth in the Rule as of the date the interest rate is set. 12 CFR § 1026.43(e)(2)(vi). Generally, this threshold is 2.25 percentage points, though higher thresholds exist for loans with smaller amounts, certain manufactured housing loans, and subordinate-lien transactions.
• No Strict DTI Limit: This revised definition does not impose a strict 43% DTI limit. Creditors must still consider and verify the consumer's DTI or residual income, but there is no specific DTI cap for QM status.
• Mandatory Compliance: The Complete Loan Application Definition for this revised definition was October 1, 2022.
• Exclusive Use: As of October 1, 2022, this revised, price-based General QM loan definition is the only General QM definition available for new applications.

The shift to a price-based definition was intended to provide a more robust and flexible standard for assessing a consumer's ability to repay, particularly in light of the expiration of the Temporary GSE QM loan definition.

Points and Fees Thresholds (Effective January 1, 2026)

The dollar thresholds for points and fees for Qualified Mortgages are adjusted annually based on the Consumer Price Index (CPI). For 2026, a covered transaction is not a Qualified Mortgage if its total points and fees exceed:

• 3 percent of the total loan amount for a loan equal to or greater than $137,958.
• $4,139 for a loan between $82,775 and $137,958.
• 5 percent of the total loan amount for a loan between $27,592 and $82,775.
• $1,380 for a loan between $17,245 and $27,592.
• 8 percent of the total loan amount for loans less than $17,245.
  • 12 CFR § 1026.43(e)(3).

For 2026, the APR for a General QM loan cannot exceed the APOR by specific thresholds, which vary based on loan amount and lien status. For example, for first-lien covered transactions with a loan amount greater than or equal to $137,958, the APR cannot exceed the APOR by more than 2.25 percentage points.

Special APR Calculation for Adjustable-Rate and Step-Rate Loans

For loans where the interest rate may or will change within the first five years after the first regular periodic payment is due (often called "short-reset" ARMs or step-rate loans), a special rule applies to the APR calculation for purposes of the price-based General QM definition.

• APR Calculation Requirement: Creditors must treat the maximum interest rate that may apply during that five-year period as the interest rate for the full term of the loan when determining the APR for QM purposes (12 CFR § 1026.43(e)(2)(iv) and 12 CFR § 1026.43(e)(2)(vi)).
• Impact on Prepaid Interest: This maximum interest rate must also be used when calculating Closing Costs (including "odd-days" or "per diem" interest) and "negative prepaid interest" (prepaid interest credits) as part of the APR calculation for the General QM special rule, even if a different rate is used for general disclosure purposes.
• Presumption of Compliance: The APR calculation, using the maximum rate, directly influences whether the loan receives a conclusive or rebuttable presumption of compliance with the ATR requirement, based on its APR relative to the APOR (12 CFR § 1026.43(b)(4) and 12 CFR § 1026.43(e)(1)).

Other Categories of Qualified Mortgages

In addition to General QMs, Regulation Z outlines other categories:

• Agency QMs (Temporary GSE QM Loans / "Patch"): This temporary provision allowed loans eligible for purchase or guarantee by Government Sponsored Enterprise (GSE) or Government Sponsored Enterprise (GSE) (GSEs (Government-Sponsored Enterprises)) to be considered QMs, regardless of the DTI ratio. This category was temporary and expired no later than January 10, 2021 (or October 1, 2022, when the applicable GSE exited conservatorship, whichever came first). Practical availability was also affected by Government Sponsored Enterprise (GSE) between the U.S. Treasury and the GSEs, which restricted GSE purchases relying on the Patch after July 1, 2021. After its expiration, loans must meet the criteria for General QM or other QM categories to receive QM status.
• HUD QMs: Most FHA-insured single-family mortgages are considered QMs, with exceptions for Reverse Mortgage Loans (HECM and Home Keeper)s and loans exempt from the ATR rule. They must also meet the CFPB's points and fees limit.
• VA QMs: Most VA-guaranteed purchase money origination loans and refinances (excluding certain Interest Rate Reduction Refinance Loans (IRRRLs)) are considered safe harbor QMs.
• RHS QMs (Rural Housing Service): RHS guaranteed loans meeting RHA guidance and specific requirements are defined as QMs.
• Balloon-Payment QMs made by Certain Creditors: Defined in 12 CFR 1026.43(f), these are exempt from the general balloon payment prohibition and may retain safe harbor status under specific conditions. Special provisions exist for small creditors operating in rural or underserved areas, allowing for certain flexibilities, such as originating balloon-payment QMs.
• Seasoned Qualified Mortgage (QM): The CFPB issued a final rule in December 2020 creating a new, specific category of "Seasoned QMs" for certain first-lien, fixed-rate loans that meet specific performance and portfolio requirements over a 36-month seasoning period, provided they were not higher-priced mortgage loans (HPMLs) at consummation and meet other criteria. This is distinct from a broader industry proposal that suggested any performing loan on a financial institution's books for at least two years should automatically convert to a QM loan. The CFPB emphasizes that ATR compliance must be determined at loan consummation, and consistent repayment over time does not retroactively validate an initial failure to assess ATR.

Key Definitions (12 CFR § 1026.43(b))

This section of Truth in Lending Act (TILA) and Regulation Z (12 CFR Part 1026) provides key definitions that are essential for understanding and applying the ATR and QM requirements.

• Higher-Priced Covered Transaction: Defined in 12 CFR 1026.43(b)(4), this refers to a covered transaction with an annual percentage rate (APR) that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set, by a specified percentage. The specific thresholds determine if a QM receives a Rebuttable Presumption (Qualified Mortgage) of compliance rather than a conclusive presumption. Refer to Rural Area Definition and Special Provisions for Small Creditors (Regulation Z) for more details.

Understanding these definitions is fundamental for creditors to correctly assess ATR and determine QM status and the associated legal protections.

Prepayment Penalties (12 CFR § 1026.43(g))

Section 12 CFR § 1026.43(g) implements the limitations on Prepayment Penalties established by Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). It sets forth the conditions under which a creditor may impose a prepayment penalty on a covered transaction. These provisions aim to protect consumers from excessive or predatory prepayment penalties, ensuring they have reasonable flexibility to refinance or pay off their mortgage early without undue financial burden.

Key Limitations

• Prohibition on Certain Loans: Prepayment penalties are generally prohibited on Rural Area Definition and Special Provisions for Small Creditors (Regulation Z)s.
• Term Limits: For loans where prepayment penalties are permitted, the penalty period is typically limited to the first two or three years after loan consummation.
• Amount Limits: The amount of the prepayment penalty is also capped, usually as a percentage of the outstanding principal balance.
• Alternative Loan Offer: Creditors offering a loan with a prepayment penalty must also offer the consumer an alternative loan without a prepayment penalty, if available, and disclose the difference in interest rates or other terms.

Refinancing of Non-Standard Mortgages (12 CFR § 1026.43(d))

This section provides specific provisions related to the refinancing of "non-standard mortgages" into "standard mortgages." This part of the rule aims to facilitate the refinancing of certain loans that may have problematic features into more stable, affordable products, while still ensuring the consumer's 12 CFR 1026 43 Ability to Repay.

Purpose

The provisions in 12 CFR 1026.43(d) are designed to address situations where borrowers with non-standard mortgages (e.g., those with adjustable rates, interest-only payments, or negative amortization) might struggle with payment increases. It provides a streamlined approach for creditors to refinance these loans into standard, fully amortizing mortgages, under certain conditions, without requiring a full ATR assessment if specific criteria are met.

Key Conditions (General)

While the full details are in the regulation, generally, for a refinancing to qualify under this section, it must:

• Be a "standard mortgage" (e.g., a fixed-rate, fully amortizing loan).
• Result in a lower monthly payment for the consumer.
• Not increase the principal balance.
• Not have certain problematic features (e.g., balloon payments, negative amortization).
• Be offered to a consumer who has demonstrated a history of timely payments on the non-standard mortgage.

This section is an important component of the ATR/QM framework, providing a pathway for consumers to transition out of potentially risky loan structures into more sustainable ones.

Small Creditor Adjustments

The rule includes specific adjustments for small creditors, such as allowing certain portfolio loans to qualify as QMs even if the DTI exceeds 43%, and providing a transition period for balloon loans.

Record Retention (12 CFR § 1026.25)

Record retention refers to the requirement for creditors to maintain evidence of compliance with various federal regulations for a specified period. This practice is crucial for allowing regulatory bodies to audit and verify a creditor's adherence to consumer protection laws, particularly those designed to prevent irresponsible lending and protect borrowers from unfair fees.

Regulatory Requirements

Under Regulation Z, specifically 12 CFR § 1026.25, creditors must retain evidence of compliance for certain aspects of dwelling-secured loans.

Duration

Creditors must retain evidence of compliance for three years after the date of consummation. This is specified in 12 CFR § 1026.25(c)(3).

Scope

This retention requirement applies to evidence related to:

• Ability to Repay (ATR) standards.
• Prepayment Penalty restrictions.

NMLS SAFE MLO National Test Relevance

MLOs must understand the specific criteria for Qualified Mortgages, the types of loans that qualify, and the legal protections they offer to lenders. The relationship between QM and the ATR rule is a critical concept for the NMLS SAFE MLO National Test, as it underpins responsible lending practices and consumer protection.