Article By: Ben Giumarra, Spillane Consulting Associates, Inc.
You’ve probably heard the rumors or even seen advertisements. Mortgage loan with no income or asset verification! (“Just sign and drive.”) Is there any truth to this?
We keep seeing advertisements and hearing rumors about “my competitor” who is offering mortgages to customers with no income or asset verification. Could this really be? Is this a return to these dangerous loan products? Do we need to relax our underwriting requirements to keep up?
That’s the short answer anyway. There are (sort of) some exceptions to this that we will discuss however.
General Answer: No
The Ability to Repay Rule took effect in 2014 and made it illegal to originate a closed-end consumer dwelling-secured loan without verifying certain factors. Those factors include:
- Income or assets
- Employment status (if relying on income)
- Mortgage payment
- Mortgage-related obligations (hazard insurance)
- Any payment on a simultaneous loan
- Recurring debt obligations (alimony, child support, auto loan)
- Debt-to-Income Ratio or Residual Income
- Credit History
Verifying these factors would also be necessary to potentially earn Qualified Mortgage status, but that’s just an extra bonus. The underlying Ability-to-Repay standard itself requires verification – and there’s no difference for Small Creditor QM, Fannie Mae QM, portfolio or anything else.
The Lender cannot pass the ATR requirement unless it considers all eight factors. And it doesn’t count as “considering” any of these factors without unless they are verified. Moreover, “verified” means verified with reasonably reliable 3rd party records, except for small exceptions with employment status and credit history.
In sum – any consumer loan secured by a dwelling post-2014 must be 100% verified – anything less is a blatant ATR violation, making this an illegal loan.
So there is no exception to the ATR’s verification rule (above). However, you have to remember that the ATR/QM rule only applies to “closed-end” “consumer” loans. The Rule doesn’t apply to open-end lines of credit or “business-purpose” loans. So, if you have a competitor offering no-verification loans, THIS is how they’re doing it … they’re structuring this in one of the following ways:
(1) Borrower as LLC or Company (business-purpose)
If the borrower is a company, as opposed to a natural person, this loan is automatically considered “business-purpose” and exempt from ATR/QM (and other Truth in Lending rules). Setting up an LLC to avoid these regulations seems strange (and impractical) – but it certainly does have that effect.
(2) Investment Property Loan (business-purpose)
Investment property loans are considered “business-purpose” and exempt in the same manner. (Careful with the precise definition of what qualifies as investment). So here again a lender could offer no-verification options.
(3) Open-End Line of Credit
While ATR/QM applies to closed-end loans, HELOCs are exempt – and therefore a lender is not prevented from offering no-verification products here.
Not to say any of those are recommend courses of action – but hopefully it explains how no-verification loans seem possible in 2017. (And shows that this is a very limited circumstance and shouldn’t pose a major concern).
In Other News
- CFPB report finds that 90% of highest-risk loan borrowers were not enrolled in federal repayment plans. Read full report here.
- Lending some credibility to the rumors that Zillow is in trouble – Zillow’s most recent SEC filing acknowledged that the CFPB has been investigating them. Despite this, I still believe Zillow to be a safe tool for loan originators to use. Some of the key language:
- In April 2017, we received a Civil Investigative Demand from the Consumer Financial Protection Bureau (“CFPB”) requesting information related to our March 2017 response to the CFPB’s February 2017 Notice and Opportunity to Respond and Advise (“NORA”) letter. The NORA letter notified us that the CFPB’s Office of Enforcement is considering whether to recommend that the CFPB take legal action against us, alleging that we violated Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) and Section 1036 of the Consumer Financial Protection Act. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action may be recommended or commenced. This notice stems from an inquiry that commenced in 2015 when we received and responded to an initial Civil Investigative Demand from the CFPB containing a broad request for information. We believe our response to the NORA letter addresses the CFPB’s concerns related to our co-marketing program under which a lender pays us to appear in advertising alongside a real estate agent. We are continuing to cooperate with the CFPB in connection with their most recent request for information. We continue to believe that our acts and practices are lawful and that our co-marketing program allows lenders and agents to comply with RESPA. … [W]e do not believe a loss is probable. There is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.
- Here’s a helpful summary of the proposed “Financial Choice Act” – which, as this article states, “would significantly impact the mortgage industry.”
On My Mind …
Have a child looking for good professional advice? How about some free advice from the wealthiest man in the world! Bill Gates offering out 14 tweets to new college grads.
1) New college grads often ask me for career advice. At the risk of sounding like this guy…
2) AI, energy, and biosciences are promising fields where you can make a huge impact. It’s what I would do if starting out today.
3) Looking back on when I left college, there are some things I wish I had known.
4) E.g. Intelligence takes many different forms. It is not one-dimensional. And not as important as I used to think.
5) I also have one big regret: When I left school, I knew little about the world’s worst inequities. Took me decades to learn.
6) You know more than I did when I was your age. You can start fighting inequity, whether down the street or around the world, sooner.
7) Meanwhile, surround yourself with people who challenge you, teach you, and push you to be your best self. As @MelindaGates does for me.
8) Like @WarrenBuffett I measure my happiness by whether people close to me are happy and love me, & by the difference I make for others.
9) If I could give each of you a graduation present, it would be this–the most inspiring book I’ve ever read.
10) @SAPinker shows how the world is getting better. Sounds crazy, but it’s true. This is the most peaceful time in human history.
11) That matters because if you think the world is getting better, you want to spread the progress to more people and places.
12) It doesn’t mean you ignore the serious problems we face. It just means you believe they can be solved.
13) This is the core of my worldview. It sustains me in tough times and is the reason I love my work. I think it can do same for you.
14) This is an amazing time to be alive. I hope you make the most of it.
“Chasing bright shiny objects is not innovation. It’s the pursuit of the make-believe. Innovation, when it works, focuses creative endeavors on products or initiatives that have the potential to deliver value to customers. Bright shiny objects do just the opposite; they waste time and energy, and produce little in return.”
– John Baldoni
(Forbes article, read here)
Thank you to Ben Giumarra, Spillane Consulting Associates, Inc., a member of our Education Committee, who with the support of other experts at SCA have put together this newsletter.