The Consumer Financial Protection Bureau (“CFPB”), in its most recent set of Supervisory Highlights, provides a bit of insight into how it interprets its Ability to Repay Rule for loans that are not Qualified Mortgages (“QMs”). However, it fails to reconcile the Rule’s contradiction that while a lender making a non-QM is not required to consider or verify the borrower’s income if it reasonably finds the borrower’s assets to be sufficient, it is nonetheless required to consider and verify a borrower’s income! Make sense?
By way of background, the Dodd-Frank Act and CFPB’s regulations generally require lenders making a closed-end residential mortgage loan to reasonably determine that the consumer will be able to repay the loan according to its terms. If the lender wants to take advantage of a safe harbor of compliance with that requirement, it may choose to make a QM in accordance with the Rule’s strict criteria for those loans. However, a lender may decide to make non-QMs, for which the Rule offers more underwriting flexibility. Still, the lender must consider eight specified factors, and verify the amounts of income or assets on which it relies using reasonably reliable third-party records.
As one of those eight factors, the lender must consider the consumer’s current or reasonably expected income or assets, other than the value of the secured dwelling. Accordingly, the lender may consider income or assets, or both. The Rule’s commentary clarifies that the creditor need consider and verify only the income or assets on which it relies in determining the consumer’s repayment ability, and it need not consider or verify a consumer’s additional income or assets that are not needed to justify the repayment determination. However, the records that a lender uses for verification must be specific to the individual consumer, as opposed to records regarding average incomes in the consumer’s geographic location or average wages paid by the consumer’s employer.
Other factors among the eight require a non-QM lender to consider the consumer’s current debt obligations, and his/her monthly debt-to-income ratio (“DTI”) or residual income in accordance with the Rule (which requires verification using reliable third-party records). Accordingly, the Rule establishes a contradiction – while a creditor may make its ability-to-repay determination based solely on the consumer’s verified assets (without regard to the consumer’s income), and need only consider or verify the amounts on which it relies to make its determination, the creditor still must separately consider and verify the consumer’s DTI or residual income.
The CFPB’s recent Supervisory Highlights reflect (but do not attempt to reconcile) this contradiction. Those highlights indicate that the agency discovered certain lenders making non-QM ability-to-repay determinations based “primarily” on verified assets, documenting the consumer’s DTI, but calculating that ratio based on income derived from internet-based estimates, rather than on the specific and verified income of the particular consumer. Although the Supervisory Highlights do not provide full details, the agency states that in one or more instances, it found that lenders were verifying the consumer’s assets, but were taking the consumer’s stated income and testing it for reasonableness using an internet-based tool that aggregates employer data and estimates income based upon each consumer’s residence zip code address, job title, and years in his/her current occupation. The CFPB warned that “this practice of failing to properly verify the consumer’s income relied upon in considering and calculating the consumer’s monthly DTI” violates the Ability to Repay Rule. (Likely those lenders would respond that they were not relying on that income, and were not required to rely on that income, but were only calculating a DTI because the Rule requires them to do so.)
So, the CFPB is reiterating that a lender making non-QMs must verify the income on which it relies using reliable third-party records that are specific to the consumer, as opposed to aggregated data and estimates based on geography, job title, or other data. That appears to be required even if, as the Supervisory Highlights explain, the lender is “primarily” relying upon appropriately-verified assets in underwriting those loans. However, the CFPB still does not explain why, if a creditor is allowed solely to rely upon verified assets in making its ability-to-repay determination, and must only verify amounts on which it actually relies in making that determination, the creditor still must consider the consumer’s DTI or residual income, and must do so based on verified and specific income records.