Requiring a Borrower’s Alternate Income Sources

QUESTION

We went through a state banking audit and were cited for requiring applicants to provide their income certain sources other than employment income. How are we supposed to underwrite loans if we don’t get that kind of information?

ANSWER

You do not specify the other sources of income in your question. However, a creditor may not inquire whether income stated in an application is derived from alimony, child support, or separate maintenance payments unless the creditor discloses to the applicant that such income need not be revealed if the applicant does not want the creditor to consider it in determining the applicant’s creditworthiness. [12 CFR § 202.5(d)(2)]

Regulation B, the implementing regulation of ECOA, provides a model application form to illustrate how income information may be requested consistent with this restriction. [12 CFR Part 202, Application B; 12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.5(d)(2)-1)] Note that one of the model forms is a version of the URLA application from January 2004, which is not the current conversion of the form specified by Fannie and Freddie.

A general inquiry about the source of income may lead an applicant to disclose alimony, child support, or separate maintenance income. So, a creditor that makes a general inquiry about the source of income should preface the request with the required disclosure about income from alimony, child support, or separate maintenance. [12 CFR Supplement I to Part 202 – Office Staff Interpretations § 202.5(d)(2)-2]

However, must the foregoing disclosure regarding income from alimony, child support, or separate maintenance be made for all requests of income? Actually, No. If an inquiry about income is specific and worded in a way that is unlikely to lead the applicant to disclose the fact that income is derived from alimony, child support, or separate maintenance payments, the disclosure regarding income from alimony, child support, or separate maintenance is not required. For instance, a creditor in an application form could ask about specific types of income such as salary, wage or investment income without providing the disclosure. [12 CFR Supplement I to Part 202 – Official Staff Interpretations § 202.6(b)(8)-1]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Loan Estimate: Disclosing Discount Points

QUESTION

When disclosing the initial Loan Estimate on an unlocked loan, do we need to disclose the discount points that would be charged as if the loan were locked at the time the Loan Estimate was disclosed?

ANSWER 

Yes, under the TILA-RESPA Integrated Disclosure (“TRID”) Rule, the disclosures always need to be made in “good faith”. Therefore, the rate and fees set forth on the Loan Estimate (“LE”) must be accurate (to the best of lender’s knowledge) on the day the disclosure is delivered to the borrower. 

Omitting a discount fee or adding a credit for a rate that is inconsistent with the lender’s rate sheet on the day the LE is disclosed to the borrower, is deceptive and not in good faith.  In essence, the lender would be making it appear to the borrower that the rate is available without a discount or with a credit, which would be inaccurate. Not only would these actions violate the spirit of TRID (viz., the “know before you owe” consumer disclosure requirements), but it may also be considered an instance of Unfair, Deceptive, or Abusive Acts or Practices (“UDAAP”).

Michael Barone

Executive Director

Director/Legal & Regulatory Compliance

Underwriting Child Support

Question

I have an applicant who pays $200 more a month than the child support order directs, which he has been doing for a few years. Do I include the additional $200 in the debt to income ratio?

Answer

Although this voluntary, regular, monthly payment is not required to be included in the in the monthly obligations, you may do so and still comply with Agency Underwriting guidelines. This is a perfect example of a compensating factor, meaning the applicant qualifies and meets the debt to income ratio guidelines while also including a regular and voluntary monthly payment that is not described as a legal obligation.

When an applicant is required to pay alimony, child support, or maintenance payments under a divorce decree, separation agreement, or any other written legal agreement (and those payments must continue to be made for more than ten months), the payments must be considered as part of the borrower’s recurring monthly debt obligations. 

FHA, VA, FNMA and FHLMC do not require voluntary payments to be taken into consideration.

Document the file with the appropriate legal documents to support the legal obligation. When that obligation will be met, or expires, is crucial. A letter of explanation from the borrower may be requested by an underwriter as a best practice, so the next person touching the file can see this issue was addressed and explained.

Brandy George

Director/Underwriting Operations Compliance

Lenders Compliance Group

Third Party Finance Charges

QUESTION

I know this seems rudimentary, but we are debating what causes any charge to become a finance charge. What is a finance charge? When are we supposed to include charges by third parties in the finance charge? And, what about finance charges associated with closing agents; that is, is there a rule for whether closing agent charges are included in the finance charge?

ANSWER

Simply put, the finance charge is the cost of consumer credit expressed as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as incidental to or a condition of the extension of credit. It is a matter of caution to consider the fact that the finance charge does not include any charge of a type payable in a comparable cash transaction. [12 CFR § 226.4(a)]

Further, participants to residential mortgage transactions often have policies that vary as to whether a particular fee is or is not treated as a finance charge. So it is advisable to understand the relevant policies of the parties with whom they conduct business.

Regarding third parties, the finance charge includes third parties if the creditor requires the use of a third party as a condition of or incidental to the extension of credit, even if the consumer can choose the third party; additionally, third party charges are included in the finance charge if the creditor retains a portion of the third party charge, to the extent of the portion retained.

[12 CFR § 226.4(a)(1)]

Closing agent charges come under a ‘special rule,’ with respect to including them in the finance charge. Specifically, fees charged by closing agents are finance charges only if the creditor (1) requires the particular services for which the consumer is charged; (2) requires the imposition of the charge; or, (3) retains a portion of the third party charge, to the extent of the portion retained. [12 CFR § 226.4(a)(2)]

Consider the fee charged by the closing agent to conduct or attend a closing. Such a fee is a finance charge, unless the charge is included in and incidental to a lump-sum fee excluded under Regulation Z, Section 226.4(c)(7), which exempts certain fees in real estate secured credit transactions from the finance charge. [12 CFR § Supp. I to part 226 – Official Staff Commentary §226.4(a)(2)-2]

In any event, and notwithstanding the above-cited exclusion, under the policies of many participants in residential mortgage transactions a fee to conduct or attend the closing is treated as a finance charge.

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

New HUD Handbook: Pre-closing Quality Control

Question

Is it true that the new FHA Guidelines require Pre-Closing Quality Control reviews?

Answer

Yes.  The U.S. Department of Housing and Urban Development issued a new handbook, FHA Single Family Housing Policy Handbook 4000.1, which is effective as of September 14, 2015 (“Handbook”). Under the Handbook, mortgagees must select FHA-insured mortgages for pre-closing quality control reviews on a monthly basis.  

Mortgages selected must be reviewed after the mortgage is approved by an FHA Directed Endorsement Underwriter and prior to closing. [4000.1 - V.A.3.a.i.(A)]   

As with post-closing reviews, loans selected for pre-closing reviews must consist of both random and discretionary samplings. [4000.1 - V.A.3.a.iv] 

However, unlike post-closing reviews, pre-closing reviews do not require mortgagees to obtain a new credit report or re-verify income, employment, assets and housing expense information. Rather, for pre-closing reviews mortgagees must evaluate all documents supporting employment, income, assets and housing expense information to ensure original documents comply with FHA’s policy requirements and to resolve any discrepancies in the documentation prior to closing. [4000.1 - V.A.3.c]

Mortgagees must also conduct a review of the property appraisal for all FHA-insured mortgages chosen for pre-closing quality control reviews.

At a minimum, the following areas must be reviewed:

1. appraisal data,
2. validity of the comparables,
3. value conclusion (as required by FHA guidance),
4. any changes made by the underwriter, and
5. the overall quality of the appraisal. Field reviews are not required for pre-closing reviews. [4000.1 - V.A.3.c]  

Michael Barone

Director/Legal & Regulator Compliance

Lenders Compliance Group