Ability to Repay Requirements for Streamline Refinances

Written By: Stacey Sprain

Much has been published lately about FHA streamline refinances particularly because of the recent drop to MIP rates for certain FHA to FHA streamline refinances but there’s one important topic I haven’t seen much if any press about and it’s an important one when we’re talking streamline refinances- important in particular for non-credit qualifying streamline refinances. Various state “ability to repay” regulations and statutes need to be considered when originating and underwriting streamline refinances.

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What is “ability to repay” and why should you care about it?
If you aren’t familiar with the term “ability to repay” you may want to become familiar with it because it’s on the table right now with the Consumer Financial Protection Bureau. See http://www.consumerfinance.gov/pressreleases/consumer-financial-protecti.... As of March 30, 2012 there are fifteen states that require mortgage lenders to make a determination of the borrower's ability to repay for certain mortgages. Generally “ability to repay” is directly connected with requirements to determine that a borrower has the means and ability to repay the mortgage loan for which he or she has applied. It falls to lenders to be aware of the various state to state regulations and minimum documentation requirements when it comes down to documenting the borrower’s specific “ability to repay.”

If you haven’t had the “pleasure” of sorting through various state laws and regulations, I can tell you first hand that it’s no picnic. There is no consistency. Overall each state has the ability to write laws and regulations that in many cases trump the guidelines and requirements that GSEs and lenders put out there. Often when trying to find a particular answer to a question it’s like trying to find a needle in a haystack. Actually, finding a needle in a haystack might actually prove to be easier, believe it or not. Each state lists their state laws and regulations differently and you may find the strangest things buried in the strangest chapters. Overall it’s just not an easy task, let’s put it that way.

The key with the various state “ability to repay” requirements is to determine whether or not one can actually offer a non-credit qualifying streamline in a particular state without violating that state’s “ability to repay” requirements. There are a number of states that require the collection of necessary documentation in order to prove the borrower’s income, assets and/or financial status is considered in the loan decision thereby eliminating the option for standard non-credit qualifying streamline refinances which do not require verification of employment, income or debts and liabilities.

To help make it easier for you to determine whether or not typical non-credit qualifying streamlines are eligible, below is a list of state requirements and each state’s “ability to repay” rules:

• Alaska- Ok for non-credit qualifying streamlines
• Alabama- Ok for non-credit qualifying streamlines
• Arkansas- Ok for non-credit qualifying streamlines
• Arizona- Ok for non-credit qualifying streamlines
• California- Ok for non-credit qualifying streamlines
• Colorado: Mortgage Loan Originator Licensing and Mortgage Company Registration Act - A mortgage loan originator must make a reasonable inquiry concerning the borrower's current and prospective income, existing debts and other obligations, and any other relevant information. A reasonable inquiry requires the mortgage loan originator to interview and discuss current and prospective income with borrowers, including the income's source and likely continuance.
• Connecticut: Non-depository Mortgage Lenders and Brokers Act - A mortgage loan originator's duty to make a "reasonable inquiry" requires the mortgage loan originator to recommend appropriate mortgage products. Mortgage loan originators may only recommend appropriate mortgage products after a reasonable inquiry has been made in order to understand the borrower's current and prospective financial status. A reasonable inquiry requires the mortgage 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 mortgage loan originator to verify such income. Mortgage loan originators have a duty to recommend mortgage products based on the information provided by the borrower.

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• Delaware: Ok for non-credit qualifying streamlines
• District of Columbia: Mortgage Lenders and Brokers Act- The current income, current debt, currents assets, current liabilities, employment, and other sources of revenue of each borrower must be verified and documented in order to determine the borrower's ability to repay a loan secured by a residential lien instrument.
• Florida: Ok for non-credit qualifying streamlines
• Georgia: Ok for non-credit qualifying streamlines
• Hawaii: Secure and Fair Enforcement for Mortgage Licensing Act - A mortgage loan Originator Company and mortgage loan originator may not originate a residential mortgage loan without regard to the borrower's ability to repay the loan according to its terms. The borrower's ability to pay may not be based on the current market value of the borrower's collateral
• Iowa: Ok for non-credit qualifying streamlines
• Idaho: Ok for non-credit qualifying streamlines
• Illinois: Residential Mortgage License Act of 1987 - A mortgage lender, broker and loan originator must determine a borrower's reasonable ability to pay:
1. Principal and interest;
2. Real estate taxes;
3. homeowner's insurance;
4. Assessments; and
5. Mortgage insurance premiums, if applicable.

Mortgage Loan Originator Law - The determination of a borrower's ability to repay a loan must take into account:
1. the borrower's ability to repay at the fully indexed rate, assuming a fully amortizing repayment schedule, and the resulting scheduled payments that may be charged under the loan accounting for interest rates, financial terms or scheduled payments that may adjust upward; and
2. Property taxes and reasonably anticipated insurance costs (regardless whether the lender or broker will collect an escrow for taxes or insurance).

It is an unfair or deceptive act or practice for a mortgage lender to make or mortgage broker to arrange a mortgage loan unless the mortgage lender or broker, based on information known at the time the loan is made, reasonably believes at the time the loan is expected to be made that the borrower will be able to repay the loan based upon a consideration of the borrower's income, assets, obligations, employment status, credit history, and financial resources, not limited to the borrower's equity in the dwelling which secures repayment of the loan.

• Maryland: Ok for non-credit qualifying streamlines
• Maine: Ok for non-credit qualifying streamlines
• Michigan: Ok for non-credit qualifying streamlines
• Minnesota: Minnesota Residential Mortgage Originator and Servicer Licensing Act- A residential mortgage originator and a person exempt from licensing may not make, provide, or arrange for a residential mortgage loan without verifying the borrower's reasonable ability to pay the scheduled payments of principal, interest, real estate taxes, homeowner's insurance, assessments, and mortgage insurance premiums. The analysis of a borrower's reasonable ability to repay the loan may include consideration of the following (if verified):

1. Current and expected income;
2. Current and expected cash flow;
3. Net worth and other financial resources (other than the consumer's equity in the dwelling that secures the loan);
4. Current financial obligations;
5. Property taxes and insurance;
6. Assessments on the property;
7. Employment status;
8. Credit history;
9. debt-to-income ratio;
10. Credit scores;
11. Tax returns;
12. Pension statements; and
13. Employment payment records.
• Missouri: Ok for non-credit qualifying streamlines
• Mississippi: Ok for non-credit qualifying streamlines
• Montana: Ok for non-credit qualifying streamlines
• North Carolina: Ok for non-credit qualifying streamlines

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

• North Dakota: Ok for non-credit qualifying streamlines
• Nebraska: Ok for non-credit qualifying streamlines
• New Hampshire: Non-depository Mortgage Bankers and Brokers Act - A mortgage banker, broker, and loan originator may not offer or extend a mortgage loan to a borrower unless a reasonable lender would believe at the time the loan is made that the borrower will be able to make the scheduled payments associated with the loan.

The loan file kept by the mortgage banker, broker, and loan originator must document the analysis used to arrive at this conclusion. Mortgage bankers and brokers must have a documented methodology that enables the banker or broker's employees, agents, and originators to make a reasonable determination that the borrower can repay a mortgage loan. The documented methodology must be approved by a senior manager. The methodology must reflect all relevant factors that have a bearing on the present and future capacity of the borrower to adequately service the debt.
• New Jersey: Mortgage Loan Company Act - Mortgage bankers and brokers must have a documented methodology that enables the banker or broker's employees, agents, and originators to make a reasonable determination that the borrower can repay a mortgage loan.

The documented methodology must be approved by a senior manager. The methodology must reflect all relevant factors that have a bearing on the present and future capacity of the borrower to adequately service the debt.
• New Mexico: New Mexico Mortgage Loan Originator Act - A mortgage loan originator must determine a borrower's reasonable ability to pay:

1. Principal;
2. Interest;
3. Real estate taxes;
4. Property insurance;
5. Property assessments;
6. Mortgage insurance premiums; and
7. Other scheduled long-term monthly debt payments.

A mortgage loan originator may not originate a residential mortgage loan that does not require documentation and consideration of the borrower's reasonable ability to repay that loan pursuant to its terms. The borrower's ability to repay must be demonstrated through reasonably reliable documentation that may include payroll receipts, tax returns, bank records, asset and credit evaluations, mortgage payment history or other similar reliable documentation. The above provisions do not apply to the following so long as each of the following, as applicable, provides the borrower with a reasonable, tangible net benefit:

(1) A residential mortgage loan originated pursuant to a government streamline program;
(2) A reverse mortgage insured as part of a government program; or
(3) To loss mitigation activities of a mortgage loan servicer or lender with which the borrower has a current relationship.
• Nevada: Mortgage Broker Act -- A lender may use any commercially reasonable means or mechanism in determining a borrower's ability to repay a home loan. A lender's duty to use any "commercially reasonable means or mechanism" to determine a borrower's repayment ability means that lenders must inquire into a borrower's current and future income and financial status (but does not dictate what specific methods must be utilized as long as they are reasonable and frequently used within the lending community). A lender may not knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower, including without limitation, a low-document home loan, no-document home loan or stated-document home loan, without determining (using any commercially reasonable means or mechanism), that the borrower has the ability to repay the loan.
• New York: Ok for non-credit qualifying streamlines
• Ohio: Mortgage Broker Act - Mortgage Loan Act - On 3/30/12 the Ohio Office of Attorney General issued additional regulations regarding a consumer's ability to repay. The added provision is that a consumer shall be considered to have an ability to repay if the lender is offering a fully-amortizing fixed-rate refinance loan that has the same or lesser interest rate as the consumer's current loan, the same or lesser principal amount as the consumer's current loan, and does not extend the payoff date of the consumer's current loan. If the consumer currently has an adjustable rate mortgage, the interest rate of the consumer's current loan is the interest rate the consumer is paying as of the date of the refinance.
• Oklahoma: Ok for non-credit qualifying streamlines
• Oregon: Oregon Mortgage Lender Law - A mortgage banker, broker or loan originator may not negotiate or make a negative amortization loan without regard to the borrower's repayment ability at the time the loan is made, including the borrower's current and reasonably expected income, employment, assets other than the collateral, current obligations and mortgage related obligations.
• Pennsylvania: Ok for non-credit qualifying streamlines.

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Mortgage Licensing Act An applicant may be presumed to have the ability to repay an offered loan if the offered loan has 1 of the following characteristics:

(1) Is insured by the Federal Housing Administration;
(2) Is guaranteed by the United States Department of Veterans Affairs;
(3) is originated or approved for purchase by the Pennsylvania Housing Finance Agency; or (4) is the subject of a written finding by a United States Department of Housing and Urban Development approved counseling agency that there is a reasonable expectation that the borrower will be able to repay the offered loan.
• Rhode Island: Ok for non-credit qualifying streamlines
• South Carolina: Ok for non-credit qualifying streamlines
• South Dakota: Ok for non-credit qualifying streamlines
• Tennessee: Ok for non-credit qualifying streamlines
• Texas: Ok for non-credit qualifying streamlines
• Utah: Ok for non-credit qualifying streamlines
• Virginia: Ok for non-credit qualifying streamlines
• Vermont: Ok for non-credit qualifying streamlines
• Washington: Ok for non-credit qualifying streamlines
• West Virginia: West Virginia Residential Mortgage Lender, Broker and Servicer Act - A lender must consider the borrower's:
1. Income;
2. Current debt;
3. Employment status and history; and
4. Other financial resources (other than equity in the dwelling that will secure the loan).

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

If a borrower's household debt-to-income ratio will exceed 50% (as determined from a credit report, credit application, financial statement) then the broker and initial lender must document in writing and maintain an assessment of the borrower's ability to repay the loan according to its terms. The assessment must be signed by the lender and the borrower and must consider:

1. The household's current debt obligations;
2. The term of the loan; and
3. The borrower's circumstances along with their current and projected income and assets (other than a security interest in the real estate taken to secure the loan).

The West Virginia Safe Mortgage Licensing Act does not contain provisions regarding borrower repayment ability.
• Wisconsin: Ok for non-credit qualifying streamlines
• Wyoming: Ok for non-credit qualifying streamlines

Do you know if your state allows you to originate non-credit qualifying streamlines without regard to your borrower’s “ability to repay?”


About The Author

Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: contact@mortgageprocessor.org.

 

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Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.