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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2016

Reduce the Onslaught

Work closely with underwriters to decrease consumer complaints

Reduce the Onslaught

Every year the Consumer Financial Protection Bureau (CFPB) publishes the Consumer Response Annual Report, which summarizes complaints generated through the CFPB Consumer Complaint Database. The 2015 report included the following statement: “Consumers also complained about delayed loan denials that occurred just before settlement, but were based upon information that was disclosed early in the application process.”

To whom did these consumers originally disclose this information? The processor? The underwriter? No, they most likely disclosed it to the mortgage loan originator, and it is a good bet that the originator will be the one on the hook for responding to the CFPB about those complaints.

There are several possible reasons why a mortgage originator might encourage a consumer to move forward with a mortgage only to have an underwriter deny the transaction. The trickiest area, however, relates to topics where underwriters can exercise discretion when determining whether or not a given set of facts about a particular borrower’s credit situation actually satisfies mortgage guidelines.

One area where discretion can come into play, for example, is when a mortgage applicant has co-signed a loan that is being repaid by another responsible party. If loan payments have been made solely by the primary borrower for a long enough period — typically 12 months — then guidelines allow for the mortgage applicant who acted as a co-signer to leave that payment out of their total debts.

If the primary borrower has made one or more late payments on the account, however, an underwriter may worry that your mortgage applicant might have to take over that payment at some point. So if there has been even a single payment that was 30 days late over the entire life of this co-signed obligation, you should run the file past your underwriter before proceeding.

There also is a lot of credit confusion lately around student loans set up on an income-based repayment (IBR) plan. Current guidelines for Freddie Mac and U.S. Department of Veterans Affairs (VA) loans allow — or at least do not formally prohibit — using the most-current IBR payment amount when calculating the debt-to-income ratio. Fannie Mae recently changed their rules to prohibit this practice, however, so  even though Freddie still formally allows the use of IBR payment amounts, your underwriter could be uncomfortable with it. If you have a borderline file, check with your underwriter to see if the student-loan debt will be an issue or not.

One other credit concern is timeshare defaults or foreclosures. Some timeshares are considered real property and are secured by a mortgage deed. Others are considered personal property that only permit use for a given number of nights. Forfeiting on this latter type of arrangement usually is not looked at as a foreclosure in terms of required waiting periods to obtain new financing. With loans that may involve Fannie and Freddie, however — neither of which have any formal guidelines in this area — make sure your underwriter will stick to this traditional viewpoint before you move forward with the mortgage.

Income concerns

Qualifying income is another area that contains a large number of discretionary issues. For example, more and more often, employees begin new jobs in a probationary period. Even if your applicant has a steady work history and his or her new job is a higher paying position in the same field, your underwriter may not be comfortable approving that loan while the applicant is technically working under probation.

Another trend in the American workplace, in response to the Affordable Care Act and other regulatory changes, is to classify many jobs as part time. Some of these jobs even offer overtime, commissions and bonuses. Even if your applicant has a long history of receiving these categories of pay in this current position, however, some underwriters will be reluctant to use them as qualifying income if the job is technically a part-time position. This is because it can be hard to prove that income will continue. Check at the beginning of the process to avoid an angry consumer and a potential CFPB complaint later on.

Finally, take the case of applicants who have turned, as many people do, to raising some of their own food and selling the surplus at roadside stands. These folks may see some benefit in reporting this income on their tax returns using a Schedule F, the form commonly used by farmers. Even if their property is clearly residential in nature and the amount of acreage is common for the area, the United States Department of Agriculture (USDA) Rural Housing Program has a guideline disallowing financing on properties that can be subdivided, which can limit the size of properties eligible for USDA loans. Other agencies do not have firm guidelines, however, so run the details by your underwriter early to avoid a late rejection.

Saving loans

Discretion can cut both ways. Although it’s unlikely you will generate a CFPB complaint if you reject an approvable loan at the point of origination, part of providing professional service to your borrowers is identifying circumstances when discretion can work in their favor.

Take VA borrowers, for example. Active military-duty personnel typically must meet one of the following criteria to secure a VA loan:

  • Have more than 12 months remaining on their Leave and Earnings Statement or their current contract (if in the National Guard or Reserves) as of the anticipated date of closing;
  • Have already re-enlisted or extended their active duty beyond such date;
  • Attest they will re-enlist and provide proof that they are eligible for re-enlistment; or
  • Have a firm civilian job lined up in a position congruent with the work they did in the military.

This question about whether a civilian job matches a veteran’s military experience closely enough provides an area where underwriter discretion can come into play. There is an additional guideline, however, where discretion can help you save a loan. If a service member is not extending his or her active duty or has not secured a qualifying civilian job, the VA will still consider approving the loan under the following conditions: 1) if the transaction includes at least a 10 percent down-payment and significant cash reserves; 2) if the applicant has strong ties to the community; and 3) if the applicant is applying with a nonmilitary spouse who earns enough income so only minimum earnings are needed from the veteran.

Discretion comes into play throughout this list. The words “significant,” “strong ties,” and “minimum earnings” are all terms that you and your underwriter will need to agree upon before you can move forward with this transaction. Even if there is some continuing ambiguity on those matters, your VA applicant may still qualify using other types of income, such as retirement, interest, dividends and royalties — if those funds will continue for the foreseeable future. If the funds will not continue long enough to cover the full term of the loan, they may be considered as an offset for debts that have 10 to 24 months remaining.

Here again, the terms “foreseeable future” and “considered as an offset” are open to discretion. Make sure you get clarity on how your file will be underwritten if approval is dependent on a favorable interpretation of one or more of these terms.

Income guidelines also can help you save a loan when going through Fannie Mae. Fannie will consider using the income of a borrower who has been self-employed for only one year, depending on how closely the applicant’s new business correlates with his or her prior position — as an employee — and the current debt level of the new business. Your applicant must clear both hurdles — “prior position” and “level of debt” — to have a chance for loan approval, so make sure your underwriter agrees with your interpretation of both factors before you set this transaction in motion.

Finally, if you have a borrower who has endured an extraordinary expense on a rental property, there is some discretionary wiggle room that might help you save a loan going through any agency. Calculating income from long-term rental properties typically requires deducting all the cash expenses related to that property as reported on the borrower’s income tax return. If your borrower, however, had a one-time event — such as a flood or a fire, or even an expensive roofing job — that caused expenses to soar, your underwriter has discretion to omit that one-time expense from the calculation.

• • •

This is just a small sampling of the guidelines that allow an underwriter to exercise discretion. Carefully review all of your files to see if there is anything you should discuss with your underwriter before submitting any loan file. This practice is good business, treats people the right way and can help you avoid getting your NMLS number attached to a CFPB consumer complaint in the future.


 


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