Ok, so all presumption of compliance aside, we all know that all consumer RE loans that fit the definition requirements must comply with ATR, but not necessarily be a QM.

So let's say a loan is considered and ATR is applied. If i understand correctly, if it is an ARM loan, the payment has to be calculated 2x...1st at the proposed payment (e.g. fixed for the first X years) and then again at 5 years.

If it is a fixed rate loan, does the same calulation time frame apply?

Also,let's assume for a minute that we calculate a DTI at inception of 40% but the 5 year DTI is 50%...are we forbidden from making the loan?

any comments?

Under general ATR, ARMs are underwritten using the fully-indexed rate and use that rate to get a fully amortizing payment-1026.43(c)(5)

For a QM ARM you must underwrite using the maximum payment possible during the first five years after the date of the first payment.-1026.43(e)(2)(iv)

In both of these instances it is only a one time calculation.

In your example, for a QM, you don't consider the DTI at origination rather the max in five years which you are saying is 50%. In that case it would be over the QM limit of 43%

If you were using general ATR, the calculation would be different (fully indexed rate) so your DTI may be lower. Also, you can set your own DTI thresholds so 50% may be acceptable to your institution.

There are quite a few threads in the ATR/QM section that go through various scenarios showing what should be used to underwrite for different products.

Wait, so you are stating that if we have a three year ARM for QM, then instead of underwriting at the fully indexed rate known at consummation, I actually have to use the potential rate at five years, thus assuming worst case scenario of rate hikes permitted under the plan?

Our arms can adjust 2 points at the end of the arm term, and then up to two points annually, so if I had a rate of 3.5 for the fixed three years, it could potentially adjust up to 9.5 at year five. So then I have to underwrite it at 7.5 versus the fully indexed rate is what you are stating?

That is not how I have understood it.

er, 9.5

Yep. You must underwrite using the highest possible payment during the first five years after the date of the first payment.

(iv) For which the creditor underwrites the loan, taking into account the monthly payment for mortgage-related obligations, using:

(A) The maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due;

Isn't this only applicable to balloons?

No, the part I quoted above is from section (e) defining QMs in general.

Section (f) discusses balloons and says that the term must be at least five years.