Borrower Repayment Ability is on the Radar

• May 2, 2011
• Anna DeSimone

by Anna DeSimone, President 

The Federal Reserve Board has proposed a Rule to implement a provision of the Dodd-Frank Act that prohibits lenders from originating mortgages without regard to the borrower’s ability to repay the loan.  Creditors must make a reasonable and good faith determination of that repayment ability, based on verified and documented evidence.

The Proposed Rule provides four options for complying with the “ability-to-repay” requirement.  The first option has 8 underwriting factors that must be considered, such as reasonable expectation of income, employment status, qualifying ratios and credit history. 
 
The second option allows a credit to refinance a “non-standard mortgage” into a “standard mortgage” in order to provide the borrower with a more stable loan program.  This option is associated with streamlined refinances without credit qualifying guidelines.  
 
The third option allows creditors to originate a “qualified mortgage.” The Proposed Rule has two alternative definitions of a qualified mortgage as a mortgage which does not contain certain features such as negative amortization, interest only, balloon payments or loan terms exceeding 30 years.  Other features include a 3% cap on the total points and fees, fully verified income and assets and loan underwriting approval is based on the fully indexed rate in five years, and other amortization factors.  The second alternative provides a rebuttable presumption of compliance.

The fourth option pertains to small creditors in rural or underserved areas where mortgages may contain certain features such as balloon payments and other amortization features otherwise not permitted under the Rule.  

Below is a matrix of anti-predatory laws as of 5/1/11 across the United States that include specific rules regarding borrower Ability to Pay.   If you don’t see all 50 states in this email, please let me know and I will send you the complete matrix.

State Matrix of Anti-Predatory Lending Laws
BORROWER REPAYMENT ABILITY  State All Loans                                                                               High-Cost Loans                                                    AK The state of Alaska has not enacted Anti-Predatory Lending Laws. Alaska has not enacted provisions specifically tailored to high-cost/covered loans. AL The state of Alabama has not enacted any Anti-Predatory Lending Laws. Alabama has not enacted provisions specifically tailored to high-cost/covered loans. AR At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. While Arkansas has enacted anti-predatory legislation under the Arkansas Home Loan Protection Act (AHLPA), the provisions of the AHLPA only apply to loans that meet the definition of a “high-cost home loan.” AZ The state of Arizona has not enacted any Anti-Predatory Lending Laws. The state of Arizona has not enacted Anti-Predatory Lending Laws. CA Division 1.6 of the Financial Code At the time a covered loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. If the loan is an ARM, the fully indexed rate of the loan must be used to determine a borrower’s repayment ability. If the loan is a Stated Income, the income stated by the borrower and all other information in the lender’s possession must be used to determine a borrower’s repayment ability. A borrower with a DTI of 55% or less is presumed to be able to make payments on the loan. While California has enacted anti-predatory legislation under Division 1.6 of the Financial Code, the provisions of Division 1.6 only apply to loans that meet the definition of a “covered loan.” CO Colorado Consumer Equity Protection Act A lender may not make a covered loan based on a borrower’s collateral without regard to the borrower’s repayment ability, including current and expected income, current obligations, and employment. If the loan is a Stated Income, a borrower’s repayment ability must be based on the income stated by the borrower and all other information in the lender’s possession. Mortgage loan originators licensed under the Mortgage Loan Originator Licensing and Mortgage Company Registration Act have a duty to:    1. make a “reasonable inquiry” concerning a borrower’s current and prospective income, existing debts and obligations, and any other information; and  2. make the loan originator’s best efforts to recommend, broker, or originate a residential mortgage loan that takes the borrower’s information into consideration.    A loan originator’s duty to make a “reasonable inquiry” requires the loan originator to recommend appropriate mortgage products. Appropriate mortgage products may only be recommended after a reasonable inquiry has been made in order to understand the borrower’s current and prospective financial status. A reasonable inquiry requires the loan originator to interview and discuss current and prospective income with borrowers, including the income’s source and likely continuance, and may not require the loan originator to verify such income.  CT  Connecticut Abusive Home Loan Lending Practices Act At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. A borrower with a DTI of 50% or less at the time the loan is closed, or at the time of the first rate adjustment if there is an introductory rate, is presumed to be able to make payments on the loan. While Connecticut has enacted anti-predatory legislation under the Connecticut Abusive Home Loan Lending Practices Act (CAHLLPA), the provisions of the CAHLLPA only apply to loans that meet the definition of a “high cost home loan.” DC At the time a covered loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. If the loan includes a balloon payment, the lender’s determination of the borrower’s ability to make the final payment may include the borrower’s equity in the property and the borrower’s ability to refinance the loan based on current market conditions. While the District of Columbia has enacted anti-predatory legislation under the Home Loan Protection Act of 2002 (HLPA), the provisions of the HLPA only apply to loans that meet the definition of a “covered loan.” DE The state of Delaware has not enacted any Anti-Predatory Lending Laws.  Delaware has not enacted provisions specifically tailored to high-cost/covered loans. FL Florida Fair Lending Act A lender may not make a covered loan based on a borrower’s collateral without regard to the borrower’s repayment ability, including current and expected income, current obligations, and employment. While Florida has enacted anti-predatory legislation under the Florida Fair Lending Act (FFLA), the provisions of the FFLA only apply to loans that meet the definition of a “high-cost home loan.” GA The Georgia Fair Lending Act does not contain provisions regarding borrower repayment ability that are applicable to all home loans. At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. A borrower with a DTI of 50% or less at the time the loan is closed is presumed to be able to make payments on the loan. HI The state of Hawaii has not enacted any Anti-Predatory Lending Laws. Hawaii has not enacted provisions specifically tailored to high-cost/covered loans. IA The state of Iowa has not enacted any Anti-Predatory Lending Laws. Iowa has not enacted provisions specifically tailored to high-cost/covered loans. The state of Idaho has not enacted any Anti-Predatory Lending Laws. Idaho has not enacted provisions specifically tailored to high-cost/covered loans. IL At the time a high risk home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on current and expected income, current obligations, employment status, and financial resources other than equity in the property. A borrower with a DTI of 50% or less at the time the loan is closed, or at the time of the first rate adjustment if there is an introductory rate, is presumed to be able to make payments on the loan. A person licensed under the Residential Mortgage Lending Act of 1987 may not make, provide, or arrange for a residential mortgage loan without verifying the borrower’s reasonable ability to pay the principal and interest, real estate taxes, homeowner’s insurance, assessments, and mortgage insurance premiums. The borrower’s income and financial resources must be verified by tax returns, payroll receipts, bank records, or other reasonably reliable methods. Stated income should be accepted only if there are mitigating factors that clearly minimize the need for direct verification of ability to repay.  For loans in which the interest rate may vary, the borrower’s repayment ability must be determined based on the “fully indexed rate.” For loans that allow for negative amortization, the principal loan amount must be calculated by including the maximum amount the principal balance may increase due to negative amortization under the terms of the loan. IN The Indiana Home Loan Practices Act does not contain provisions regarding borrower repayment ability that are applicable to all home loans. A lender must make a high cost home loan with due regard to the borrower’s repayment ability by following commercially reasonable practices in determining the DTI. Commercially reasonable practices include using a DTI of 41% or less and the residual income guidelines established by VA. KY Kentucky Anti-Predatory Lending Law At the time a high-cost home loan is closed, the lender must reasonably believe that the borrower will be able to make the payments on the loan based on the borrower’s income, obligations, employment status, and financial resources other than equity in the property.   The lender must verify the borrower’s:  1.    reasonable ability to pay all scheduled payments of principal, interest, taxes and insurance; and  2.    income and financial resources through tax returns, payroll receipts, bank records, or other similar documents. A borrower is presumed to be able to make payments on the loan if, at the time the loan is closed:   1.   the borrower has a DTI of 50% or less;  2.    the loan has been approved by an automated underwriting service offered by Fannie Mae or Freddie Mac;  3.   the lender verifies and documents that the borrower has liquid assets equal to 50% of the principal loan amount; or  4.    the borrower has sufficient “residual income” as defined in the guidelines established by the VA.
While Kentucky has enacted anti-predatory legislation, the provisions of Kentucky’s Anti-Predatory Lending Law only apply to loans that meet the definition of a “high-cost home loan.”
LA	The state of Louisiana has not enacted any Anti-Predatory Lending Laws.	Louisiana has not enacted provisions specifically tailored to high-cost/covered loans.

Ability to Pay Laws –  States M-Z

Note, however, that the Maryland Mortgage Lender Law and the Maryland Mortgage Originator Law contain “refinancing” provisions applicable to all residential mortgage loans. While not expressly designated as “anti-predatory legislation”, the provisions are discussed herein due to the similarity to “refinancing” provisions contained in the Anti-Predatory Lending Laws of other states. See Refinancing Restrictions for further information.

In addition, Maryland general law contains counseling disclosure provisions applicable to all “mortgage loans.” While not expressly designated as “anti-predatory legislation,” the provisions are discussed herein due to the similarity to counseling disclosure provisions contained in the Anti-Predatory Lending Laws of other states. See General Disclosures for further information.

Rate Spread Home Loans
A lender may not make a rate spread home loan unless the lender reasonably believes that the borrower has the ability to repay the loan based on the borrower’s credit history, current and expected income, current obligations, employment status, and other financial resources other than equity in the property. The lender must take reasonable steps to verify the accuracy and completeness of information provided by the borrower using tax returns, payroll receipts, bank records, reasonable alternative methods, or reasonable third-party verification.

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