As a lender there is not much more that you can do other than memorialize the client’s acknowledgement of their ability-to-repay you, per the terms of the agreement. After all, VA has been doing it for years, and it seems to work out well for them. This process can be as simple or complex as you would like to make it. While a client’s acknowledgement is NOT required by the CFPB, the practice is meant to be a precautionary measure to protect your company against Rebuttable Presumption claims. It seems pretty logical to me that a company would do at least something to protect their loan decision from the scrutiny of the courts.
I’ve heard of lender’s approaching this process 5 different ways.
- Not doing anything! Definitely not recommending that!
- VA Budget (Form 26-6393-VA Loan Analysis)-Modified for other types of loans, but the same premise. Just be sure that your residual tolerances are consistent for everyone to prevent fair lending issues. The more that you specifically nail down your qualification policies, the better you can protect your company.
- A basic budget that the client fills out and signs.
- A letter of Acknowledgement with the payment information, loan terms, discussions of home maintenance cost and the importance of budgeting for these things. While this does not address their financial situation specifically, it is better than no acknowledgement at all.
- All loans with a Ratio that exceeds (x % or, other criteria that you may deem borderline) must go to a third party housing counselor. This is based from your written policy that your company determines yields a higher risk client. The key is to make sure this applies to everyone that falls into the policy you set, to avoid fair lending issues. Additionally, a policy for borderline clients (as defined by your company) provides you with a budget analysis by an objective 3rd party should you need evidence or testimony during litigation.
Done well and applied consistently to all of your applicants, this procedure should significantly reduce your risk exposure under a client’s ability to repay. With just this slight modification, your company is doing about as much as they can, to acknowledge that both parties in the agreement are on the same page regarding the client’s ability to pay back the loan.