After the bursting of the housing bubble and the ensuing financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P.L. 111-203 ), a broad package of reforms that touched on many aspects of the financial system. It was intended to address the problems that led to turmoil and to ensure that the financial system and the economy are better positioned to withstand future market disruptions. While some view the Dodd-Frank Act as essential to ensure that consumers are not abused and to promote stability in the financial system, others believe the reforms have imposed an unnecessary burden on lenders—especially small lenders —and have made it more difficult for some consumers to receive loans, particularly mortgages. Critics have highlighted the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rule, which implements a Dodd-Frank Act requirement, as a subject of particular concern. Among other things, they argue that the Small Creditor Portfolio QM, a compliance option under the rule that is intended to benefit small creditors that keep loans in portfolio, should be broadened. They propose modifying the rule to make it easier for a lender to comply if it keeps the loan instead of selling it to another institution. Supporters of expanded portfolio lending proposals argue that because the lender is holding the loan in its portfolio, it is exposed to the risks associated with the loan (such as the risk that the lender will not be repaid) and therefore has the incentive to ensure that the loan is safely underwritten. Critics of the expanded portfolio lending proposals argue that the incentives of holding the loan in portfolio are insufficient to protect consumers and that the existing protections in the rule are essential to ensuring that the failures of the past are not repeated. This report will briefly explain the ATR rule and will analyze the policy debate related to portfolio lending and qualified mortgages. Title XIV of the Dodd-Frank Act established the ATR requirement. Under the ATR requirement, a lender must determine based on documented and verified information that, at the time a mortgage loan is made, the borrower has the ability to repay the loan. A lender must consider and verify certain types of information prior to originating a loan, including the applicant's income or assets, credit history, outstanding debts, and other criteria. Lenders that fail to comply could be subject to legal liability, such as the payment of certain statutory damages. Under the Consumer Financial Protection Bureau (CFPB) rule implementing the ATR requirement, a lender can comply with the ATR requirement in two ways. First, a lender can originate a mortgage that meets the relatively less prescriptive underwriting standards of the General ATR Option. Under the General ATR Option, the loan does not need to satisfy specified criteria, but the lender must not make a mortgage "unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms." Second, a lender could originate a mortgage that satisfies the more prescriptive standards of the QM rule. A QM is more prescriptive than the General ATR Option in the sense that, to receive QM status, the mortgage must satisfy specific underwriting and product-feature requirements and document compliance with the requirements. When a lender originates a mortgage that receives QM status, it is presumed to have complied with the ATR requirement, which consequently reduces the lender's potential legal liability of its residential mortgage lending activities. A lender can comply with the ATR rule by making a mortgage that is not a QM and instead satisfies the General ATR Option, but the lender will not receive the additional legal protections. The definition of a QM, therefore, is important to a lender seeking to minimize its legal risk of its residential mortgage lending activities, specifically its compliance with the statutory ATR requirement. Some are concerned that, at least in the short term, few mortgages will be originated that do not meet the QM standards due to the legal protections that QMs afford lenders, even though there are other means of complying with the ATR requirement. Underwriting and product-feature requirements of the QM categories are intended to ensure that a mortgage receiving QM status satisfies certain minimum standards, with the standards intended to offer protections to borrowers. A loan that satisfies the less strict General ATR Option, in contrast, is allowed to have a balloon payment, a term in excess of 30 years, and other features that are generally prohibited in a QM so long as the lender verifies that the borrower would have the ability to repay the loan. In the preamble to the final rule, the CFPB explained that the ATR requirement is intended to address certain market failures that policymakers identified in the housing finance system. Some attribute the expansion in mortgage credit that fueled the housing bubble to market failures that encouraged lenders to offer and borrowers to accept more credit than was socially optimal. Market failures can occur in many instances in the housing market, such as lenders and borrowers not accounting for societal costs outside of a transaction (such as foreclosure) and borrowers' difficulty in understanding mortgage terms and accurately assessing their ability to repay given that consumers typically have limited experience buying and financing a house. According to the CFPB, the "Dodd-Frank Act and the final rule address these potential market failures through minimum underwriting requirements at origination and new liability for originators ... in cases where the standards are found not to be met." The minimum standards and the new liability are intended to encourage lenders to account for costs in addition to those that they bear when extending credit and to make more informed underwriting decisions, potentially reducing market failures and resulting in a more socially optimal amount of credit being allocated. The underwriting requirements and new liability in the ATR rule are viewed as working in tandem to encourage the lender to determine that the borrower will be able to repay the loan. If the lender originates a loan that satisfies the minimum underwriting standards (the General ATR Option), then the lender is exposed to a certain amount of legal liability. But if the lender originates a mortgage that meets more prescriptive requirements and is therefore deemed a QM, then the lender is exposed to less legal risk. The reduced legal risk is warranted, the CFPB argues, because the QM's minimum underwriting and product-feature standards "are judged in the rule to be enough to ensure that the lender made a reasonable and good faith determination that the borrower will be able to repay the loan." The CFPB notes that lenders, therefore, face a tradeoff between (1) "exert[ing] greater care in underwriting the loan" to ensure that it receives QM status and the reduced liability associated with it or (2) performing a potentially less thorough and less costly initial underwriting of the General ATR Option and having a greater exposure to liability. In summary, the additional liability and the minimum underwriting standards enacted as part of the Dodd-Frank Act are intended to address market failures that some policymakers believed fueled the housing bubble that precipitated the financial crisis. As discussed in more detail later in this report, some argue that the QM rule is one size fits all, has led to an unnecessary constriction of credit, and has been unduly burdensome on lenders. For a more detailed overview of the ATR rule and QM compliance options, see CRS Report R43081, The Ability-to-Repay Rule: Possible Effects of the Qualified Mortgage Definition on Credit Availability and Other Selected Issues , by [author name scrubbed]. The Dodd-Frank Act defined a qualified mortgage but also provided the CFPB the authority to "prescribe regulations that revise, add to, or subtract from the criteria that define a qualified mortgage" under certain circumstances. The CFPB-issued QM regulations establish a Standard QM that meets all of the underwriting and product-feature requirements outlined in the Dodd-Frank Act. However, the QM regulations also establish several additional categories of QM that provide lenders the same presumption of compliance legal protections with the ATR requirement as a Standard QM. One of those additional categories is the Small Creditor Portfolio QM . The CFPB argues that the Small Creditor Portfolio QM is "necessary to preserve access to responsible, affordable mortgage credit for some consumers." It believes "that portfolio loans made by small creditors are particularly likely to be made responsibly and to be affordable for the consumer." To receive QM status under the Small Creditor Portfolio QM, three broad sets of criteria must be satisfied. First, the loan must be held in the originating lender's portfolio for at least three years (subject to several exceptions). Second, the loan must be held by a small creditor , which is defined as a lender who originated 2,000 or fewer mortgages in the previous year (excluding portfolio loans) and has less than $2 billion in assets. Third, the loan must meet certain underwriting and product-feature requirements. Compared with the Standard QM, the Small Creditor Portfolio QM has less prescriptive underwriting requirements and is intended to reduce the regulatory burden of the ATR rule for small creditors. To receive QM status under the Standard QM, a borrower must have a debt-to-income (DTI) ratio below 43% after accounting for the payments associated with the mortgage and other debt obligations. Under the Small Creditor Portfolio QM, the lender is required to consider and verify the borrower's DTI but does not have a specific numeric threshold that the borrower must be below. A lender, therefore, has the flexibility to offer a loan with a higher DTI ratio if the lender determines that the borrower is creditworthy.