Federal mortgage-related laws

Ability to Repay, QM & LO Compensation

These rules decide whether a loan was responsibly underwritten and whether the MLO was paid lawfully. Expect questions on the eight ATR factors, what disqualifies a qualified mortgage, the 2026 points-and-fees caps, and pay plans that do or do not vary with loan terms.

Federal mortgage-related laws4 min read7 sections

Must-know for the exam

ATR applies to closed-end dwelling-secured consumer credit; HELOCs, reverse mortgages, timeshares and 12-month bridge loans are exempt (12 CFR 1026.43(a)).
Eight ATR factors include income or assets, employment, payments, simultaneous loans, debts, DTI or residual income and credit history (12 CFR 1026.43(c)(2)).
Verify income with reasonably reliable third-party records; qualify ARMs at the greater of the fully indexed or introductory rate (12 CFR 1026.43(c)(4)-(5)).
QMs cannot have negative amortization, interest-only payments, most balloons or terms over 30 years (12 CFR 1026.43(e)(2)).
2026 QM points-and-fees cap: 3% for loans of $137,958 or more; $4,139 for $82,775 to $137,957 (effective Jan 1, 2026).
General QM price test: APR below APOR + 2.25 for first liens of $137,958 or more (2026 figure).
QM first liens under APOR + 1.5 get a safe harbor; at 1.5 or more a rebuttable presumption (12 CFR 1026.43(b)(4), (e)(1)).
LO pay may not vary with loan terms or proxies; a fixed percentage of loan amount is allowed (12 CFR 1026.36(d)(1)).
No dual compensation: if the consumer pays the originator, no one else may (12 CFR 1026.36(d)(2)).
Anti-steering safe harbor: show lowest rate, lowest rate without risky features, and lowest points and fees options (12 CFR 1026.36(e)(3)).

On this page · 7 sections

Traps that cost marks

Assuming a borrower's age or retirement plans are ATR factors.
Treating a signed borrower statement as verification of income.
Thinking ATR applies only to primary-residence purchase loans.
Qualifying the borrower at the introductory teaser rate.
Thinking adjustable-rate loans cannot be qualified mortgages.
Relying on the old 43% DTI cap and forgetting the 30-year term limit.
Using the 5% HOEPA trigger instead of the 3% QM cap.
Applying the 3% cap to a mid-size loan that has a flat-dollar limit.

Why it matters on the test

After the 2008 crisis, Dodd-Frank made lenders responsible for confirming that borrowers can repay and stopped loan originators from being paid more for worse loans. The SAFE MLO Test checks both: underwriting scenarios ('what must the creditor consider?') and compensation scenarios ('may the company pay this bonus?').

The rule: ability to repay

A creditor must make a reasonable, good-faith determination, based on verified information, that the consumer can repay (12 CFR 1026.43(c)). The eight factors:

•current or reasonably expected income or assets (not the home itself);
•current employment status, if relying on employment income;
•the monthly payment on the loan;
•the monthly payment on any simultaneous loan;
•mortgage-related obligations (taxes, insurance, HOA dues);
•current debt obligations, alimony and child support;
•the monthly debt-to-income ratio or residual income;
•credit history.

Payments are calculated with the greater of the fully indexed rate or any introductory rate, using substantially equal, fully amortizing payments (12 CFR 1026.43(c)(5)).

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