Which Loans Are Exempt From the ATR Rule?

The Ability-to-Repay (ATR) rule protects consumers in mortgage lending. It ensures lenders assess a borrower’s financial capacity to repay a mortgage before extending credit. This prevents consumers from taking on unaffordable mortgage debt, fostering a more stable housing market. While it broadly applies to most consumer mortgage loans, specific categories and transactions are exempt.

Understanding the Ability-to-Repay Rule

The Ability-to-Repay rule, implemented by the Consumer Financial Protection Bureau (CFPB) as part of Regulation Z under the Truth in Lending Act (TILA), requires lenders to determine a consumer’s ability to repay a mortgage loan. This requirement applies to most closed-end consumer credit transactions secured by a dwelling. The rule was established following the 2008 financial crisis to curb irresponsible lending practices that contributed to widespread foreclosures.

Lenders must consider and verify a borrower’s financial situation. This includes examining their current or expected income and assets, current employment status, and existing debt obligations. Lenders must assess these factors to ensure that the borrower can manage the loan payments, even if there is an introductory interest rate that later increases.

Loans Explicitly Exempt from the Ability-to-Repay Rule

Several types of loans are explicitly exempt from the Ability-to-Repay rule. These exemptions acknowledge the unique characteristics or purposes of certain credit products or the nature of specific lending entities.

Reverse mortgages are one such exemption, designed for homeowners typically aged 62 or older, allowing them to convert a portion of their home equity into cash without selling the home. Unlike traditional mortgages, borrowers generally do not make monthly mortgage payments; instead, the loan is repaid when the last borrower leaves the home, sells it, or passes away.

Home Equity Lines of Credit (HELOCs) are generally exempt from the ATR rule because they are open-end credit plans. A HELOC allows a borrower to draw funds as needed up to a pre-approved limit, rather than receiving a lump sum upfront. While HELOCs are typically outside the ATR rule’s purview, lenders are prohibited from structuring a closed-end loan as a HELOC simply to evade ATR requirements.

Loans secured by an interest in a timeshare plan are also explicitly exempt from the ATR rule. These loans are specifically tied to the purchase of timeshare interests, which differ significantly from traditional residential property ownership and associated mortgage lending.

Temporary or bridge loans, characterized by short terms, typically 12 months or less, are exempt from the ATR rule. These loans often serve as interim financing, for instance, to cover the period between purchasing a new home and selling an existing one.

Certain construction loans also fall under an exemption. Specifically, the construction phase of a construction-to-permanent loan is exempt if its initial term is 12 months or less, with the possibility of renewal. This exemption applies to the initial building period, recognizing that the permanent financing phase of such a loan would typically be subject to the ATR rule.

Loans made by Housing Finance Agencies (HFAs) are often exempt from the ATR requirements. HFAs are state-level entities that provide affordable housing options, often offering mortgages with favorable terms to low- and moderate-income borrowers. This exemption supports their mission to expand access to affordable housing.

Loans made by certain non-profit organizations may also be exempt from the ATR rule under specific conditions. These organizations must be designated as non-profits under section 501(c)(3) of the Internal Revenue Code. The exemption generally applies if they extend dwelling-secured credit no more than 200 times annually, provide credit only to low-to-moderate income consumers, and follow their own written procedures to determine repayment ability.

Scenarios Not Covered by the Ability-to-Repay Rule

Beyond explicit exemptions, certain types of credit transactions are not subject to the Ability-to-Repay rule because they fall outside its fundamental scope. The rule was specifically designed for consumer mortgage lending, and therefore, transactions that do not fit this definition are simply not covered.

Commercial or business loans, for example, are not subject to the ATR rule. The rule applies exclusively to consumer credit transactions, meaning loans taken out by individuals primarily for personal, family, or household purposes. Loans obtained by businesses for operational expenses, investments, or commercial property acquisitions do not fall under this consumer protection regulation.

Similarly, loans not secured by a dwelling are outside the ATR rule’s purview. The rule’s application is tied to credit transactions secured by a residential structure, such as a house, condominium, or mobile home. This means that credit products like auto loans, personal loans, or student loans, which are not secured by real estate, are not covered by the ATR requirements.

Other forms of open-end credit beyond HELOCs are also not covered by the ATR rule. While HELOCs are a specific type of open-end credit that is explicitly exempt, general credit cards or unsecured personal lines of credit are inherently outside the scope of a rule focused on dwelling-secured transactions. The ATR rule’s intent is to regulate closed-end consumer mortgage loans, and credit products that do not fit this mold are not subject to its provisions.