Why Haven’t Loan Officers Been Told These Facts?

FNMA/FHLMC COVID Updates, Underwriting the Self Employed Just Got a Whole Lot Easier – For Some

Another Reason for Early Tax Filing

So it appears there is some light in the tunnel for self-employed applicants. The GSEs are returning to more of a pre-COVID requirements footing. At least for the self-employed who have filed their 2021 tax return.

What to do if 2020 is the most recent tax return available
Peel back risk layers if you’d rather avoid getting beat like a dirty mattress

Consider integrating an audited P & L into your loan requirements for self-employed prospects with ancient tax returns. Some loan officers and their customers may balk at the hassle and expense of audited statements. Consequently, having a well-developed plan B such as a Non-QM solution is an excellent idea.

The GSEs no longer have an ATR magic wand to wave over the loan and make it compliant. Therefore, the Temporary QM model is dead for all practical purposes.

Maybe the current market conditions are revealing a few ATR implementation shortcomings. Did Congress charter the GSEs to exclude the self-employed from homeownership opportunities? This self-employed predicament is why more competition is essential to the mortgage business. Otherwise, we get what we are now experiencing. FrankenFannie meets Godzilla 2022. Many well-qualified low-risk self-employed consumers are unnecessarily disadvantaged by the nexus of ineffective regulation and misguided, overbroad legislative mandates.

Paralyzed by bureaucracy and size, our GSEs and their minders must adapt to the changing times. The GSEs are our strength but also are proving to be our weakness. So it’s time for stakeholders to make some changes. Make the damn loans or get out of the way. Good loans. There is more risk and jeopardy (for all participants) in any FHA bucket than we will ever see in 25% down, stated income/no income loans. A return to more appropriate risk management is overdue.

But has the industry learned its lessons? Could the laws permit for more latitude in credit decisions? Or would the Wall Street magicians return the industry to its knees? The industry can do self-employed loans just fine. However, foolishness, avarice, and evil are never exhausted when it comes to people and money. Consequently, regulation is necessary. But, with greater flexibility coupled to appropriate “lanes,” the industry can manage performance risk without much trouble. So let’s not throw the baby out with the bathwater again.

By now, everyone knows the GSEs must establish ATR just like everyone else (except FHA, VA, and USDA, they still have an ATR magic wand). The Final QM Rule moves the mandatory revised General QM compliance date to 10/01/22. However, since the GSEs only purchase new consumer loans compliant with the revised General QM standard, is there a Temporary QM anymore? Yes, permitted in Regulation Z. No, the GSEs are not permitted to purchase covered loans that don’t meet the revised General QM standard. So if the GSEs can’t buy the loan, how could any loan be a Temporary QM loan anymore? Catch-22. No more Temporary QM (a.k.a. the GSE Patch).

Is there room for a return to limited documentation loan manufacture for lower-risk transactions? Maybe this time, we can get it right. Let’s face it, before long, the continued reliance on unaudited P & Ls may become an issue. Considering the rising expenses associated with colocation and employees, self-employed knowledge workers are here to stay.

The TILA states the lender must use “third-party documents that provide reasonably reliable evidence of the consumer’s income.” The lender’s reliance on an unaudited P & L is not much different from a stated income loan. Hence the greater scrutiny using reliable third-party verification for those folks that have yet to file their 2021 return. This reliance on the P & L represents a gray area of the ATR, and Regulation Z. Congress said to get a tax return. They didn’t say what year! Oops, LOL!

With all that said – make sure you pay attention to the self-employment verification requirement. Once again, lenders must establish that the business is in existence and functioning near the closing date. All applications with self-employed income are subject to these last-minute verification standards, designed to establish that the business exists and is operating at the time of closing. The time to make the prospect aware of this is when all the other requirements are made known – upfront. Not the week of closing.

Keep in mind FHLMC will not accept 2020 tax returns for the most recent year on or after November 1, 2022.

When submitting dated documentation, remember to be alert to risk layers and lender overlays.


“When a borrower is using self-employment income to qualify, the lender must verify the existence of the borrower’s business within 120 calendar days prior to the note date. Due to latency in system updates or recertifications using annual licenses, certifications, or government systems of record, lenders must take additional steps to confirm that the borrower’s business is open and operating. The lender must confirm this within 20 business days of the note date (or after closing but prior to delivery).”

  • Below are examples of methods the lender may use to confirm the borrower’s business is currently operating:
  • Evidence of current work (executed contracts or signed invoices that indicate the business is operating on the day the lender verifies self-employment)
  • Evidence of current business receipts within 20 days of the note date (payment for services performed)
  • Lender certification the business is open and operating (lender confirmed through a phone call or other means)
  • Business website demonstrating activity supporting current business operations (timely appointments for estimates or service can be scheduled).

Self-employed and planning to buy a home – file that 2021 return now.

Fannie Mae LL-2021-03 Page 1 of 6
Lender Letter (LL-2021-03) Updated: Feb.2,2022
To: All Fannie Mae Single-Family Sellers
Impact of COVID-19 on Originations
COVID Updates, Feb. 2, FNMA Lender Letter here:


Behind the Scenes
Non-QM Lending – Compliance Nuts and Bolts

The ATR/QM Rule applies to almost all closed-end consumer credit transactions secured by a dwelling. The Rule generally applies to loans made to consumers and secured by residential structures that contain one to four units, including condominiums and co-ops.

The ATR/QM Rule is not limited to first-lien loans and applies to second homes. Otherwise, the standard TILA exclusions apply.

Congress codified anti-steering laws by legislating the Dodd-Frank Title XIV TILA amendments. In the past, one of the more egregious failures of lenders and loan officers to act in the consumer’s best interest was steering prime mortgage-eligible consumers into subprime loans. Be mindful that if the consumer qualifies for an available QM loan, generally, TILA makes it unlawful to put a prospect for a consumer mortgage into a Non-QM loan.

Recall recent history, going back to interagency guidance on subprime lending. The interagency precept is still valid and dovetails with the codified requirements. When presenting subprime loans, “Consumers should be informed of whether there is a pricing premium attached to a reduced documentation or stated income loan program” (Read, subprime financing). The concept is that the lender is responsible for ensuring that the consumer understands the price of subprime financing compared to prime financing. Effective loan presentations achieve this comparison awareness.

Regulation Z demands transparency and the informed use of credit. The informed use of credit is partially achieved through loan comparisons.

When and how to set a course for subprime financing depends on your business model. If you offer prime and subprime financing, an adverse action before making the pivot to Non-QM is probably in order.

Forecasting underwriting decisions can be a crapshoot. Credit policies and risk tolerances are fluid. Who KNOWS what practices shall be when the loan goes to underwriting? Last week’s practices may differ from this week. Therefore if you regularly originate prime and subprime loans, you should give evidence of best efforts to procure the prime financing before consummating subprime financing.

Leadership and communication are paramount when effectively managing the prospect’s expectations in relation to more dynamic loan manufacture.

Consider carefully prefacing the origination with clear and precise communications. For example, “Please understand that ABC mortgage makes our best effort to procure the very best financing for our customers. Mr. Borrower, we shall do what we can to get Loan A. However, because of the uncertainty surrounding the verification of income, in all likelihood, Loan B is the more probable outcome.”

Here is what Congress had to say about providing the best financing available.

(TILA) 15 USC 1639b(c)(3) “The Bureau shall prescribe regulations to prohibit mortgage originators from steering any consumer from a residential mortgage loan for which the consumer is qualified that is a qualified mortgage to a residential mortgage loan that is not a qualified mortgage.”

Here is how the CFPB interpreted and implemented the Congressional intent. Essentially, do a good job and get the consumer the loan that is in their best interests.

Regulation Z 12 CFR 1026.36(e) “In determining whether a consummated transaction is in the consumer’s interest, that transaction must be compared to other possible loan offers available through the originator, if any, and for which the consumer was likely to qualify, at the time that transaction was offered to the consumer. Possible loan offers are available through the loan originator if they could be obtained from a creditor with which the loan originator regularly does business.”

To get your mind around this, consider that the loan in question has closed. “In determining whether a consummated transaction is in the consumer’s interest, that transaction must be compared to other possible loan offers available through the originator, if any, and for which the consumer was likely to qualify, at the time that transaction was offered to the consumer.” So if your business is exclusively Non-QM and you don’t offer anything but Non-QM loans, that could be all you need to shop for, Non-QM solutions.

However, if you offer prime financing, how would you evidence that a subprime loan was in the consumer’s interest at the time you offered the subprime solution? Perhaps you might say, “The loan officer did a prequal and determined the applicant couldn’t meet the FNMA standards.” Then, be prepared, how you respond to the following questions: “Is there evidence that a prime loan was offered to the consumer? Is there any evidence of the credit decision analysis that determined the consumer’s disqualification for prime financing? Do you have a copy of the adverse action notice? Was the applicant given an opportunity to cure any deficiencies in their loan application? Do you regularly authorize loan officers to make credit determinations, or was it just in this instance? Can you provide evidence of the loan officer’s underwriting training? When can we interview the loan officer?” Uh-oh.

Regulation Z gives a benchmark for how originators should shop for loans. Regulation Z states that the lender should consider what “Possible loan offers are available from a creditor with which the loan originator regularly does business.” Therefore, if the lenders you work with do not offer prime financing and only offer subprime, offering only subprime solutions to the consumer is acceptable. However, if you offer prime financing – the adverse action notice before closing a subprime loan might be in order.

When the prime credit decision is a question mark, nothing says you can’t double app the loan manufacture when the timing requirements are such. Always be forthcoming with the fulfillment partners.

Generally, the beneficial difference between prime and subprime does not require a slide ruler or math degree. But there could be cases where the comparison is close. Aside from the occasional outlier, most prime/subprime comparisons will conclude that the prime loan is in the consumer’s best interest. Therefore there should be clear evidence that the consumer did not qualify for better financing.


Tip of the Week – Don’t Piss-Off Your Regulator
What Has Your Regulator So Pissed OFF?

In this week’s series, we have a business licensee and his branch manager (the responsible broker) who came into the state regulator’s sights.

In addition to the specific statutes below, the regulator found numerous record-keeping and supervisory violations. Primarily no responsible broker for periods of time.

The fines and investigation cost sting, but the license revocation and a five-year ban from the business are brutal.

This enforcement action is from our friends at the Washington Department of Financial Institutions (W-DFI).

From the W-DFI (Redacted and Abridged)

It is AGREED that Respondents shall pay a fine to the Department in the amount of $25,000.
Licensees (Responsible broker and the Company owner) jointly and severally pay a fine. As of the date of this Statement of Charges, the fine totals $50,000.

Between July 21, 2020, and August 26, 2020, the Department conducted an examination of (Complainee’s) business practices for the period of September 1, 2017, through June 30, 2020. The Department determined that Respondents violated the Act and related rules as described below.

Mortgage Loan Originator Compensation. On at least four occasions between September 1, 2017, and June 30, 2020, (Complainee) made payments to loan originators based on the terms of a transaction.

  • Based on the Factual Allegations set forth in Section I above, (Complainees) are in apparent violation of RCW 19.146.0201(11) and 12 CFR 1026.36(d)(1)(i) of the Truth in Lending Act for compensating MLOs based upon the terms of a transaction.
  • Anti-Money Laundering Program. (Complainee) failed to develop and implement a compliant anti-money laundering program.
  • Identity Theft Prevention Program. (Complainee) failed to develop and implement a compliant identity theft prevention program.

Pursuant to RCW 19.146.245, a licensed mortgage broker is liable for any conduct violating the Act by the designated broker, a loan originator, or other licensed mortgage broker while employed or engaged by the licensed mortgage broker.

A designated broker, principal, or owner who has supervisory authority over a mortgage broker is responsible for a licensee’s, employee’s, or independent contractor’s violations of the Act if: the designated broker, principal, or owner directs or instructs the conduct or, with knowledge of the specific conduct, approves or allows the conduct; or the designated broker, principal, or owner who has supervisory authority over the licensed mortgage broker knows or by the exercise of reasonable care and inquiry should have known of the conduct, at a time when its consequences can be avoided or mitigated and fails to take reasonable remedial action.

Therefore, it is the Director’s intent to ORDER that:

  • (Complainee’s License) to conduct the business of a mortgage broker be revoked.
  • (Complainee’s) license to conduct the business of a loan originator be revoked.
  • (Complainee Branch Manager) license to conduct the business of a loan originator be revoked.
  • (Complainee’s) be prohibited from participation in the conduct of the affairs of any mortgage broker subject to licensure by the Director, in any manner, for a period of five years.