With more aggressive lending compliance standards and regulations in 2014, lenders have been scrambling to implement internal systems in order to comply. Every real estate professional should understand the central issue that will impact their clients who obtain loans at the closing table: the “Ability to Repay” Rule (ATR).

The momentum behind ATR is to reduce systemic fraud, reduce borrower litigation in order to correct faulty lender underwriting guidelines, and protect local markets from predatory lending or price fixing. Earlier this year, JPMorgan and Bank of America initiated lawsuits against the national title insurance underwriters for their local agents’ failure to identify fraud. Whether this failure was due to compliancy or complicit behavior is no longer relevant in the new lending era of Dodd-Frank. Higher standards make each participant vigilant on compliance and identifying fraud with more checks and balances from the loan processor to the closing table. It is now the agent’s duty to determine if the ATR rule and the supporting paperwork are correct. Every aspect of the loan is now scrutinized, even the title insurance underwriter, closing office, and closing attorney.

Furthermore, the Ability to Repay (ATR) rule is ambiguous. The rule itself doesn’t have a specific set of percentages or dollar guidelines. It requires the lender to make a reasonable, good faith determination—before and when a loan is consummated—that the consumer has the assets needed to repay the loan. Specifically, buyers should be prepared with paperwork to support their loan request and these documents must have 3rd party verification. To assist loan transactions, the Consumer Financial Protection Bureau (CFPB), which was formed under Dodd-Frank in 2010, states that creditors generally must consider eight underwriting factors and generally use reasonably reliable third party records to verify the information when implementing the ATR Rule. These factors are:

• Current or reasonably expected income or assets
• Current employment status
• The monthly payment on the covered transaction
• The monthly payment on any simultaneous loan
• The monthly payment for mortgage related obligations
• Current debt obligations, alimony, and child support
• The monthly debt to income ratio or residual income
• Credit history

Lenders will be presumed to have complied with ATR if they issue a Qualified Mortgage. Real estate professionals should be on the lookout for these indicators to verify their clients are receiving a Qualified Mortgage when at the closing table:

• No excess upfront points and fees (currently used is
  3% of mortgage value)
• No toxic loan features (such as interest only, negative
  amortization, or loan term longer than 30 years)
• Cap on debit to income ratio (current standard is 43%
  except for government affordability standards)
• No balloon payments

One such new “checks” at the closing table are 3rd party verification services. For the first time in my 18 years as a real estate attorney, my office was required to go through a 3rd party vetting process prior to the lender sending over a title request on a loan. It was an interesting process performed by The Title Attorney Support Team/ Q&A Department of a servicer. The lender’s name was withheld and the request only identified the property, not the borrower. Disclaimers were pronounced advising that this was not a request to prepare a title package for closing but a verification of my company’s authenticity and HUD compliance practices. My underwriter was contacted to confirm my license and I was required to produce references. This entire process took approximately one week.

Moving forward, expect to see more 3rd party vendors being used to verify the borrower’s information, property details and closing transaction procedures. Lenders now view the closing agents as the front lines to verify if a transaction is legitimate under the ATR and with a wave of 2014 lawsuits against title insurance underwriters for their agents’ failures, I think the trend of passing compliance issues onto the local closing table will continue.

You can never substitute passion with hard work but you can use hard work to succeed with your passion.

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Renee Marie Smith, Esq., Author of the My Guru book Series

Visit us at:
www.smithtitleservices.com
and www.mygurupublishing.com