Ben Giumarra

Interest is stirring over the topic of no-income verification loans – sometimes called “liar” loans. Some in the industry blame them for the last mortgage crisis. Are they making a comeback, despite the Dodd-Frank Act’s regulatory changes?

The short answer is no. I believe, however, that some limited exceptions are to blame for the uptick in interest in this topic – everyone seems interested in how their competitors are offering these loans (and they are convinced that they are).

No-verification loans have been illegal since the Consumer Financial Protection Bureau’s Ability-to-Repay regulation took effect in 2014. Whether it falls under the general ability-to-repay requirements or is protected by Qualified Mortgage status, every residential mortgage loan must be fully verified, mostly through third-party independent written records.

General Rule
Where the ability-to-repay regulations apply, the lender must document and verify certain key factors such as incomes and/or assets, mortgage-related obligation, recurring debt obligations, and others. All debts need to be fully verified with independent third-party written records. The same is true with any income or assets relied upon in making the decision. So this leaves no room at all for no-verification loans. These verification requirements apply where the loan is protected by qualified mortgage status. But they apply even where the lender is willing to originate non-qualified-mortgages. There’s simply no exception here.

Exceptions
But these ability-to-repay regulations don’t apply to every single type of loan. Specifically, they apply to all closed-end consumer mortgage that are secured by the borrower’s dwelling.

This leaves a few types of loans outside of the reach of the ability-to-repay regulation. Some key examples include: loans where the borrower is an organization (such as an LLC); loans secured by a non-owner-occupied investment property; and open-end lines of credit.

Now, it’s unusual to restructure a mortgage loan so that it closes in the name of an LLC just to avoid regulations like ability-to-repay. But putting aside the practicality, if the loan is exempt from the ability-to-repay rules, then no-verification loans might be possible. And I think this answers the question of the day – where lenders are offering no-verification loans, it can only be with these limited products.

There’s one last caveat. While the ability-to-repay regulations require complete verification with “reasonably reliable” third-party written records, there are various ways to meet this requirement, especially if a lender is willing to originate a non-qualified-mortgage. For example, the lender may accept bank statement records showing deposits rather than by requiring IRS tax statements.

This example of relaxed verification standards (and other similar examples) do seem to be getting more traction lately. Now, whether you consider these aggressive or open-minded, keep in mind that such products would be less likely to meet qualified mortgage requirements. This provides a natural break and limits how far lenders will go with this product.

Not having qualified mortgage protection means that the lender has to feel comfortable proving (in court) that it was “reasonable” and in “good faith” to determine the borrower had a “reasonable ability to repay the loan.” For anybody who’s ever gone through the foreclosure process or otherwise been in court with a consumer, that gives the jury and a plaintiff’s attorney some scary language to work with. For that reason, I don’t think lenders will get carried away with these relaxed standards.

So no, the sky isn’t falling. If no-verification loans are making a comeback, it is in a very small way, and only on a limited number of products.

Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@scapartnering.com or (781) 356-2772.