The Consumer Financial Protection Bureau released its spring 2017 Supervisory Highlights touching on, among other things, the ability-to-repay rule as it relates to the origination of non-qualified mortgages or non-QM loans. In line with that, the Bureau clarified that a downpayment can’t be treated as an asset for verification purposes under the ATR.
Verification of Income and Assets
The ATR rule requires lenders to make a reasonable and good faith determination of a borrower’s ability to repay his/her mortgage. Consequently, the ATR has set minimum guidelines with which lenders can incorporate in their own underwriting standards.
To form the basis of a borrower’s repayment ability, the lender will consider the following eight factors under 12 CFR 1026.43 (c) (2).
(i) the consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan;
(ii) if the creditor relies on income from the consumer’s employment in determining repayment ability, the consumer’s current employment status;
(iii) the consumer’s monthly payment on the covered transaction, calculated in accordance with paragraph (c) (5) of the ATR rule;
(iv) the consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made;
(v) the consumer’s monthly payment for mortgage-related obligations;
(vi) the consumer’s current debt obligations, alimony, and child support;
(vii) the consumer’s monthly debt-to-income ratio or residual income; and
(viii) the consumer’s credit history.
The Bureau noted that a lender can verify a borrower’s income or assets as set forth above and on reliable records from third-party sources.
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If a lender deems to verify a borrower’s assets in making non-QMs; it should reasonably and in good faith determine that the verified assets were indeed sufficient to establish the borrower’s ability to repay.
Moreso that the lender who relied on those verified assets and not on income can properly determine that income is not necessary for a reasonable and good faith determination of the borrower’s repayment ability.
Downpayment not an Asset
In its supervisory highlights, the CFPB made clear that downpayment is not an asset and is excluded from the verification of either assets or income under the ATR rule.
The Bureau put emphasis on point (i) above whereby the “value of the dwelling, including any real property attached to the dwelling, that secures the loan” is excluded from a borrower’s current or reasonably expected income or assets to be verified by the lender.
A downpayment forms part of the house securing the QM loan. While the size of the downpayment can decrease the loan amount and thus enhance the chances of it getting repaid, there is no direct link between the downpayment size and ability-to-repay performance going forward. Add to that the downpayment is not part of the ATR’s minimum standards for underwriting.
“Therefore, standing alone, down payments will not support a reasonable and good faith determination of the ability to repay,” the CFPB wrote.