If this has been asked already I apoligize. We have a customer who has a debt listed on her credit report that she claims is paid by her daughter. If we get 6 months worth of cancelled checks from her daugher to verify this, would we be able to not include this debt in her debt-to-income ratio?? Or do we have to include this loan no matter what since it will be an HPML loan?

The customer is obligated on the loan. Even if the daughter has paid the payments for the last 60 months, the mother is responsible for the payment today if for any reason the daughter quits paying.

From the Commentary to 226.34

2. General prohibition. Section 226.34(a)(4) prohibits a creditor from extending credit subject to Sec. 226.32 to a consumer based on the value of the consumer's collateral without regard to the consumer's repayment ability as of consummation, including the consumer's current and reasonably expected income, employment, assets other than the collateral, current obligations, and property tax and insurance obligations. A creditor may base its determination of repayment ability on current or reasonably expected income from employment or other sources, on assets other than the collateral, or both.

I have another question regarding the ability to repay. The regulation states that you have to document repayment ability based on the highest payment in the first seven years. For a 3/1 ARM for example, with caps of 2%, would this mean that you have to figure out what the payment would be if your rate went up 2% in years 4,5,6,7? If you are starting out with a rate of 6% and a ceiling of 12%, would you need to calculate a payment for repayment ability at a rate of 12%?

yes

The answer is actually no.

You would calculate repayment ability based on the highest payment that would be shown on your TIL disclosure. There is no requirement to accelerate the interest to the highest level.

K. Bloom, the Commentary to 226.34 has a good explanation on how to calculate the ability to repay addressing both balloons and ARMs.

I have read the commentary and understand that but here is our situation. 3/1 ARM - Initial rate of 5.60% with a floor of 5.60%, ceiling of 11.625%, caps of 2% and a current market rate of 3.500%. The TIL shows 360 monthly payments of $341.02 and doesn't show the payment ever changing. According to our software provider this is because the market rate is lower than the floor which is the same as the initial rate so the rate could never be lower. Our calculation summary shows the highest payment in 7 years as $341.02 so is that what you use? I know this is how the TIL reads but the payment could increase by 2% so do you have to do a worse case scenario? Wasn't that the purpose of the regulation - to make sure borrowers could still afford their payments if the payments went up?

The worse case scenario is a disclosure requirement of an ARM but is not a requirement for calculating ability to repay.

Because 5.6% is your disclosed and contracted floor rate the loan is fully indexed at consummation and the payment shown in the payment stream will be the only scheduled payment. The fully indexed rate is what you have to be concerned with at consummation. Look at the example in .34 for the 5 and 7 year "discounted" ARM.