Legal: Documenting Your Financial Assessment Determinations

Written by John Levonick, as originally published in The Reverse Review.

I love acronyms and, as a self-proclaimed mortgage compliance nerd, I strive to use as many acronyms in my day as I can. The year 2014 has been good to me, with many new mortgage compliance acronyms to choose from.

In January came Ability to Repay (ATR) and, not to be outdone, the reverse mortgage industry will soon have its own acronym to reflect its amorphous credit determination process. In mortgagee letters 2013-27 and 2013-28, and amended by 2013-45, HUD issued guidance on HECM mortgagees regarding Financial Assessment requirements and funding requirements for the payment of property charges (“Financial Assessment Requirements”). This basically dictates that, among other things, the lender must assess and validate that the HECM borrower has the Capacity or Willingness to Meet Their Financial Obligations (CoWTMTFO)—namely, to pay taxes, insurance and other property charges.

While we all understand these requirements are subject to revision prior to the establishment of an effective date, let’s take a look at some of the possibly overlooked concerns and implications of the Financial Assessment requirements as mortgagee letters 2013-27 and 2013-28 define them.

With this new power to make the determination of capacity or willingness comes great responsibility, as the obligation is on lenders to not only make this CoWTMTFO determination without violating Fair Lending laws, but to support it conclusively with documentation that is accurate and adequate as it applies to all of the borrowers’ income and assets (and those of non-borrowing spouses in community property states), as well as all outstanding debt obligations in their entirety. Since reverse lenders have had exposure to traditional conventional mortgage lending credit models, this new requirement, at least on its face, should not be a real shock to the system. A closer look, however, indicates that there are some potential problems.

The two mortgagee letters 2013-27 and 2013-28 lay out requirements for the lender to be able to:

no.1 Systemically and uniformly capture and analyze the relevant borrower income and asset data

no.2 Assess if the borrower has a satisfactory credit history by demonstrating that the borrower has had no property tax arrearages in the 24 months prior to the date of the initial loan application

no.3 Ensure that all property charges are current at application

no.4 Verify that homeowner’s insurance has been in place for a minimum of 90 days prior to the date of initial loan application

no.5 Validate that the borrower has a satisfactory payment history on revolving credit, installment accounts and mortgages

These requirements seem straightforward enough. The next step would be to look at, and attest to, the fact that the borrower has a history of, direct experience with, and the capacity and willingness to pay property taxes and hazard and flood insurance. If there is no provable history or experience, a sufficient set-aside is required. The potential problems arise with the terms “capacity” and “willingness” to pay.  How does the lender structure this analysis and price for risk? This must be done in a way that ensures that the lender’s pricing, products, process and determinations—which may be based on and subject to disparate treatment—cannot, in fact, have a disparate impact on the borrower.

When the determination of history, experience, capacity and willingness is combined with the comprehensive credit analysis and supported with documentation reflecting the acceptable residual income calculation, you have clear and unequivocal proof that the borrower has the personal ability to meet the requirements of CoWTMTFO… or do you?

Financial Assessment Factors: Getting to Know the HECM Hybrid 1009 By now, lenders are well aware of the insufficiency of Fannie Mae Form 1009, Residential Loan Application for Reverse Mortgages, as it applies to the need to collect information on income, expenses, assets and liabilities in the application process. A quick and easy solution is to port the Form 1003 Universal Residential Loan Application Part VI into the 1009 to create a hybrid custom Residential Loan Application for Reverse Mortgages 1009 (“HECM Hybrid 1009”). This seems simple enough, but there is more to the 1009 now.

Part VII is the section of the 1009 that many lenders have not had to understand fully due to its seeming irrelevance to reverse mortgages.  The 1009 Part VII “Acknowledgement and Agreement” is effectively the same language that is contained in Section IX of the 1003. This has been the basis on which many conventional lenders have relied in seeking redress from borrowers that lied or “made material misrepresentations with regard to the income, assets and debt obligations… that the lender detrimentally relied upon in making of the subject loan.”

This section, effectively, is an affidavit that the borrower is attesting to the comprehensiveness and accuracy of the information given to the lender as part of the application process. Why does this matter? Well, this is the section that will be relied upon when the lender, or creditor of record, receives a repurchase demand notice from the investor because the taxes and/or insurance have not been paid, and the investor deems the lender’s WTP analysis to be insufficient. There may, in fact, be a question as to the accuracy of the information relied upon by the lender in making the WTP analysis.

Welcome to the world of repurchase demands. The FHA will look to protect the integrity of the Mutual Mortgage Insurance Fund, so lenders can plan on put-back claims due to FHA denials of coverage claims. While reverse lenders would do well to rely upon the guidance provided in specific sections of HUD Handbook 4155.1 (Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans) for documenting and verifying credit history, income, assets and obligations, and for information on documentation standards, there is much to be learned from the conventional lending side of the business. Fair lending and fraud concerns pose significant risk that drive specific processes and controls. Conventional lenders have learned the hard way that these practices may be the best foundation for reverse mortgages and other products going forward.

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