No, CDFIs are not required to use the ability to repay standards and metrics established by the CFPB to demonstrate they have underwritten a consumer, mortgage, and/or small business loan to ensure the borrower has the ability to pay back that loan. Question PM14 of the Application asks whether “the Applicant’s underwriting standards for each of its covered mortgage, consumer, and/or small business loan products include an assessment of the borrower’s ability to pay back the loan according to the terms of the loan, meet any of the borrower’s other major financial obligations, and still pay basic expenses, without having to reborrow or refinance (except for any final mortgage balloon payment)?”
CDFIs are exempted from CFPB’s Ability to Repay/Qualified Mortgage (ATR/QM) rule (12 CFR § 1026.43) and the CDFI Fund does not require Applicants for Certification to meet the specific ATR requirements prescribed by the rule. However, for the purposes of CDFI Certification, the CDFI Fund regards the consideration of a borrower’s ability to pay back a loan a basic principle of responsible financing practices. The CDFI Fund also notes that regulated entities already are subject to prudential standards that require the consideration of a borrower’s ability to repay a loan.5
The CDFI Fund’s Certification standards for responsible financing practices do not dictate how an Applicant underwrites its loans to determine a borrower’s ability to pay back a loan. An Applicant that does not use the underwriting standards prescribed by CFPB may still meet the standard for Certification through alternative underwriting approaches that consider a borrower’s ability to pay back a loan including, for example, the use of qualitative compensating factors, alternative data (such as a cash flow analysis based on deposit account activity or rent payment history), or alternative or more inclusive credit models (including higher debt to income ratios).
If an Applicant does not consider a borrower’s ability to pay back a loan for any of its covered mortgages, consumer or small business loan products, it may offer an explanation of how this otherwise ineligible practice serves a community development purpose and is consistent with a community development mission.
5 See, for example, the FDIC’s Interagency Guidelines Establishing Standards for Safety and Soundness (12 CFR Appendix A to Part 364, Title 12), which state in part that “An institution should establish and maintain loan documentation practices that… [i]dentify the purpose of a loan and the source of repayment, and assess the ability of the borrower to repay the indebtedness in a timely manner” (12 CFR Appendix-A-to-Part-364 C.2). The guidelines similarly state that the institution also “should establish and maintain prudent credit underwriting practices that [p]rovide for consideration, prior to credit commitment, of the borrower's overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower's character and willingness to repay as agreed” (12 CFR Appendix-A-to-Part-364 D.3).