Saturday, October 6, 2007 - Article by: Lender411 Member
I have gotten a lot of calls in the last few weeks from very nervous real estate agents. They have asked me if stated income loans will become illegal in Nevada as of October 1, 2007 when the new Nevada Lending Law goes into effect.
The rumors have been flying. Other lenders and sales people have told them this is the case. These agents are rightfully concerned.
They are wondering if they need to start looking for other careers. Stated income loans and other low documentation loans are so prevalent in our city because of the number of "tipped" employees we have, like service industry people and casino workers. If they were to be eliminated, that would certain be a crushing blow to our market. Some say, the elimination of these loans would likely result in 20-30% depreciation.
You can breathe a bit easier today. The answer is stated income loans are not illegal and will not become illegal when Assembly Bill 440 (Nevada Lending Law) goes into effect on October 1, 2007.
In a letter dated Thursday September 13, 2007 to all Mortgage Banker and Broker Licensees from Joseph L. Waltuch, Commissioner of the Mortgage Lending Division in Nevada, confirmed this.
Here are some parts of his letter.
EXCERPTS FROM THE LETTER FROM COMMISSIONER WALTUCH:
The Mortgage Lending Division (the "Division") has become aware that there exists some confusion amongst licensees regarding certain amendatory language to the new Nevada Lending Law.
Effective October 1, 2007 it will be an unfair lending practice for a lender to:
"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 home loan."
Many licensees have expressed concern as to the meaning of "commercially reasonable means or mechanism" in the context of determining that the borrower has the ability to repay the home loan.
This does not prohibit specific mortgage products or types of documentation that may be utilized in the making or underwriting of home loans.
Instead, the new law recognizes, and specifically defines, "low-document", "stated-document" and "no-document" home loans.
What all of these definitions have in common is that they specifically pertain to the borrower establishing his or her ability to repay a home loan, in other words, what income and asset documentation, if any, the borrower may submit to prove his or her ability to repay.
These definitions do not address the lender's obligation to verify the accuracy of the information the borrower has submitted or otherwise determine the borrower's ability to repay.
The Division believes it means that licensees must inquire into a borrower's current and future income and financial status, but without dictating what specific methods must be utilized as long as they are reasonable and frequently used within the lending community.
Licensees should meet with their borrowers [that means all borrowers obligated on the particular loan] in person, over the telephone, or in other ways where personal contact is achieved, and discuss their economic situation, including their employment, credit history, current sources and amounts of income and assets, and the likelihood of any of these items changing [up or down] in the reasonably foreseeable future. While no particular time span is contemplated, for purposes of this guidance, the reasonably foreseeable future should at least encompass a time span past the first adjustment date of a variable rate home loan.
Licensees must verify the information that the borrowers provide. The Division recognizes that there are some general sources, such as Salary.com or the Department of Labor, which may be utilized to verify income in those situations where verification of employment, pay stubs or tax returns are not utilized.
Licensees who in good faith complete this worksheet, or a similar worksheet that properly documents the discussions and verifications, for all home loans funded on or after October 1, 2007 will be deemed for examination purposes to be in compliance with the "commercially reasonable means or mechanism" provisions of the new law.
OK, so basically the Commissioner is saying the law recognizes that low documentation loans do exist and will continue to exist.
What they are requiring, according to this letter, is that lenders use a "commercially reasonable means or mechanisms" to determine if the borrower's stated income is in line with his industry. They are requiring that we use "industry standard means" to make this determination.
Many lenders use the website Salary.com, or similar sites like it, for this. You can go to that website, type in "janitor" and it will tell you the average range of income a janitor expect to make in Las Vegas.
If you are a teacher, you cannot state that you make $150,000 per year so that you can qualify to buy a home. It's unreasonable.
If you are a waitress at an everyday coffee shop, you cannot state you make $100,000 per year so the loan works. It won't fly.
If you are a craps dealer at the local's casino, you cannot state you make $120,000. It will not likely pass the reasonability tests that will be required by law on October 1st.
When you state your income going forward, we are now required by law to go to websites like salary.com to see if its "reasonable." If its not, you won't be able to claim that it is without providing further proof.
The new law also requires that lenders go over your entire financial picture and to make a determination if you will be able to pay your new mortgage into the foreseeable future. It is a felony, punishable with jail time, if you commit mortgage fraud.
The Commissioner also presented a worksheet that the Division recommends that all brokers and bankers use on lower documentation loans, to help assist in the confusion of this new law.
The worksheet looks like this:
"ABILITY TO REPAY LOAN" WORKSHEET:
To the Borrower: Commencing October 1, 2007 Nevada Revised Statute 598D.100 requires the mortgage broker or mortgage banker named below to use any "commercially reasonable means or mechanism" to verify that you have the ability to repay the home loan for which you are applying.
There is no requirement that you enter into any proposed loan transaction even though you may have submitted an application to the broker/banker. Be sure that all of the terms set forth below are accurate and that you agree to them.
To be completed by Borrower [complete as applicable]:
The purpose of this loan is to _____ purchase a home or _____ refinance a current home loan.
The loan is a _____ fixed rate or _____ adjustable interest rate loan.
My monthly pre-tax income is $____________. I _____have or _____have not submitted pay stubs or tax returns to the mortgage broker/banker as proof of this income.
The mortgage broker/mortgage banker has discussed with me:
_____ My overall economic situation
_____ My employment, including length of time on job and prospects for its continuation in the future
_____ My credit history and credit score
_____ My current sources and amounts of income and assets, and the likelihood of any of these items changing [up or down] in the reasonably foreseeable future
_____ The information required on my loan application
_____ That if I have applied for an adjustable rate loan, the interest rate may increase and my monthly payments may go up substantially on and after the first change date
_____ Other: List ______________________________________________________
I certify under penalty of perjury that I have the financial ability to repay the loan I have applied for. I have carefully reviewed any and all rate loan disclosures that have been provided to me, and agree that even if the interest rate on my adjustable rate loan increases and my monthly payments increase as result, I can still afford to repay the loan.
_____________________ _____________________ ______________________
Borrower Signature/Date Borrower Signature/Date Borrower Signature/Date
To be completed by mortgage broker/mortgage banker:
This is a:
_____ Full document loan
_____ Low document loan
_____ No document loan
_____ Stated income loan
_____ Other [describe]_________________________________
I have verified the income amount provided by the Borrower by:
_____ U.S. Department of Labor
_____ Other: specify [i.e. VOE, pay stubs] ________________________________
I have also discussed with the Borrower the items s/he has checked above, and have given him/her a completed copy of this worksheet.
I certify under penalty of perjury that the above is true and correct.
Name of Mortgage Broker/Banker: ____________________
License Number: ____________________
At the end of the day, in my opinion, this is a law meant, in large part, to protect consumers from unethical loan officers who inflate or overstate the borrower's income to simply get a loan through, sometimes without the borrower's knowledge.
These loan officers did not effectively explain to the borrower the potential negative consequences of this action, and today hundreds of thousands of foreclosures are occurring nationwide, in part, because people bought homes they simply could not afford.
Who is to blame for this? All of us are to blame. Among "us" are....
Loan officers and real estate agents who wanted deals to close with no thought or consideration about the ability of the borrower to repay the loan.
Didn't find the answer you wanted? Ask one of your own.