As consumers increasingly accept nontraditional jobs and move away from standard, well-documented income patterns, mortgage lenders are faced with an old dilemma taking on a slightly new form: whether loans made from bank statements documenting a borrower’s cash flow into and out of their bank accounts are safe. With many things these days, the answer is that it depends.
Theoretically, a bank statement loan can be sufficiently documented under the ability-to-repay rules, depending on the underwriting and reasonableness of the assumptions relevant to the approval. However, lenders are increasingly adopting assumptions for evaluating bank statements that are extremely vulnerable to attack under the ATR laws. These assumptions ignore realities, or uniformly apply standards, that are in many cases erroneous and overstate income.
For example, certain lenders have programs determining personal income off of gross business revenue. Of course, depending on the type of corporate structure and the industry, profit realization can widely vary and using a constant is fraught with risk. After all, if a lender assumes the borrower has 30% profit in an industry where the average profit is 10%, it might be hard to convince a jury there was a reasonable good faith belief in the income. Similarly, some lenders are conducting residual income analysis assuming a 25% tax rate. Again, depending on the borrower’s income bracket and state of residence, it’s very plausible such assumptions exaggerate income in a manner that can be proven with relative ease.
Lenders need to re-evaluate alternative documentation loans to ensure that their underwriting standards apply broadly to all borrowers. Otherwise, to the extent a borrower can subsequently demonstrate the standards for a percentage of borrowers were foreseeably inaccurate, the creditor is vulnerable to an ATR claim.
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