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#1897409 - 02/14/14 04:53 PM Self Employed Borrowers
reed3065 Offline
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Maybe this has been addressed already, but I could not find the thread. We will soon be looking at mid-year requests from SE borrowers which manage their financials using QuickBooks or the checkbook/shoebox method, then have an outside accoutant prepare their TRs. So, if we receive a request mid-year, we will not be able to get "3rd party reviewed" YTD financial statements. My conversations with local acocuntants is that they will not simply look over a QuickBooks statement and provide any kind of opinion. These are not "liar loans", simply requests from less sophisticated borrowers and we need to underwrite in some consistent manner. Has anyone out there put some guidelines together to address these borrowers?

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Ability to Repay/Qualified Mortgage Rule
#1897441 - 02/14/14 05:25 PM Re: Self Employed Borrowers reed3065
MyBrainHurts Offline
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Illinois
We have debated this, and over the loud objections of the lenders, have concluded that unless the statements are from a third party, they cannot be considered verified and cannot be used to determine ATR.
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#1897535 - 02/14/14 08:28 PM Re: Self Employed Borrowers reed3065
Oursisnottoreasonwhy Offline
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Central Illinois
From Appendix Q

Establishing a Consumer's Earnings Trend.

a. When qualifying income, the creditor must establish the consumer's earnings trend from the previous two years using the consumer's tax returns.

b. If a consumer:

i. Provides quarterly tax returns, the income analysis may include income through the period covered by the tax filings, or

ii. Is not subject to quarterly tax returns, or does not file them, then the income shown on the P&L statement may be included in the analysis, provided the income stream based on the P&L is consistent with the previous years' earnings.

c. If the P&L statements submitted for the current year show an income stream considerably greater than what is supported by the previous year's tax returns, the creditor must base the income analysis solely on the income verified through the tax returns.

d. If the consumer's earnings trend for the previous two years is downward and the most recent tax return or P&L is less than the prior year's tax return, the consumer's most recent year's tax return or P&L must be used to calculate his/her income.

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#1897551 - 02/14/14 08:54 PM Re: Self Employed Borrowers reed3065
dblack Offline
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AL
^^^

While the above is true, the P&L that you use must be prepared by a third party. That is what the OP is questioning, I believe.

(3) Verification using third-party records. A creditor must verify the information that the creditor relies on in determining a consumer's repayment ability under § 1026.43(c)(2) using reasonably reliable third-party records



Third-party record means:

(i) A document or other record prepared or reviewed by an appropriate person other than the consumer, the creditor, or the mortgage broker, as defined in § 1026.36(a)(2), or an agent of the creditor or mortgage broker;
Last edited by dblack; 02/14/14 08:56 PM.
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#1897597 - 02/14/14 09:53 PM Re: Self Employed Borrowers dblack
Reads Regs Offline
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The following is from page 20 of the CFPB's small entity compliance guide for the QM/ATR rule.

i. Consumer-supplied income documents
(§ 1026.43(b)(13))
Sometimes you may have to rely on the consumers’ report of their own income. For example, a cattle rancher might give you an updated profit-and-loss statement for the current year to supplement his tax returns from prior years. These records are reasonably reliable third-party records to the extent that an appropriate third party has reviewed them. For example, if a third-party accountant prepared or reviewed the cattle rancher’s profit-and-loss statement, then you can use the statement to verify the rancher’s current income.

Most of Appendix Q is very similar to HUD's FHA loan requirements. You might want to look at HUD handbook 4155.1. It discusses self-employed individuals in chapter 4 section e. http://portal.hud.gov/hudportal/HUD?src=...oks/hsgh/4155.1
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#1897600 - 02/14/14 10:05 PM Re: Self Employed Borrowers reed3065
Oursisnottoreasonwhy Offline
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Central Illinois
(4) Verification of income or assets. A creditor must verify the amounts of income or assets that the creditor relies on under § 1026.43(c)(2)(i) to determine a consumer's ability to repay a covered transaction using third-party records that provide reasonably reliable evidence of the consumer's income or assets. A creditor may verify the consumer's income using a tax- return transcript issued by the Internal Revenue Service (IRS).

I read this section, in conjunction with Appendix Q, as giving you some latitude. If you follow Appendix Q in how to establish earnings trend and have the 2 years signed tax returns or transcripts and YTD P&L and BS prepared by the borrower. You could argue that you have "reasonably reliable evidence of the consumer's income". Definitely a grey area that needs to be addressed by the CFPB quickly or self employed borrowers may not be able to get a mortgage loan without 3rd party prepared statements.

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#1897613 - 02/14/14 10:36 PM Re: Self Employed Borrowers Oursisnottoreasonwhy
dblack Offline
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Originally Posted By: Oursisnottoreasonwhy
(4) Verification of income or assets. A creditor must verify the amounts of income or assets that the creditor relies on under § 1026.43(c)(2)(i) to determine a consumer's ability to repay a covered transaction ]using third-party records that provide reasonably reliable evidence of the consumer's income or assets. A creditor may verify the consumer's income using a tax- return transcript issued by the Internal Revenue Service (IRS).

I read this section, in conjunction with Appendix Q, as giving you some latitude. If you follow Appendix Q in how to establish earnings trend and have the 2 years signed tax returns or transcripts and YTD P&L and BS prepared by the borrower. You could argue that you have "reasonably reliable evidence of the consumer's income". Definitely a grey area that needs to be addressed by the CFPB quickly or self employed borrowers may not be able to get a mortgage loan without 3rd party prepared statements.


You didn't underline the important part though.... The items you use to verify income must be from third parties.
Last edited by dblack; 02/14/14 10:37 PM.
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#1897655 - 02/15/14 04:31 PM Re: Self Employed Borrowers reed3065
reed3065 Offline
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Yes, the requirement the records be prepared by a reliable third party is the key point of my original post. If the intent of the regs is to force ALL self-employed borrowers to retain an accountant to prepared YTD financial statements, then "Houston, we have a problem ...". It will need to be clarified by the folks at CFPB soon.

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#1899730 - 02/25/14 05:27 PM Re: Self Employed Borrowers reed3065
Reads Regs Offline
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Originally Posted By: reed3065
Yes, the requirement the records be prepared by a reliable third party is the key point of my original post. If the intent of the regs is to force ALL self-employed borrowers to retain an accountant to prepared YTD financial statements, then "Houston, we have a problem ...". It will need to be clarified by the folks at CFPB soon.


Has anyone heard if the CFPB has opined on this, either formally or informally?
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#1901690 - 03/03/14 06:46 PM Re: Self Employed Borrowers reed3065
ahkcompliance Offline
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Joined: Sep 2008
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Midwest
I'm looking at a loan that is scheduled to close later in this week. I'm going over the lenders ATR. The co-borrower is self employed. The lender used the past two tax returns and used the income off the P&L statement. The lender took the average of the 2 years and used that as her income.

To me the process the lender used makes sense but wanted others input as well.

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#1967531 - 10/07/14 03:18 PM Re: Self Employed Borrowers reed3065
Norman Paperman Offline
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Perhaps I missed it in the threads above, but did anyone ever come back with a definitive practice/document for verifying self employment?

I have a self employed borrower, who prepares her own taxes. I require tax transcripts for income verification, but will that suffice for employment?
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#1968420 - 10/09/14 04:27 PM Re: Self Employed Borrowers reed3065
Norman Paperman Offline
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bump.
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#1969835 - 10/16/14 04:00 PM Re: Self Employed Borrowers reed3065
rlcarey Offline
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I don't think you are going to find any solid guidance. I would be looking for current year records to indicate that current year is reasonably expected to equal the last two years.
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#1971755 - 10/24/14 02:08 PM Re: Self Employed Borrowers rlcarey
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A prospective residential mortgage loan customer is a physician who was employed by a local clinic during 2012 and 2013. In 2014 he established his own practice and is now considered self employed.

Appendix Q states "if the period of self employment is less than one year, the income from the consumer may not be considered effective income". He has been self employed for 10 months. His earnings while at the clinic and his current earnings definitely support the required payment, but it appears we would be prohibited from making the loan.

Does anyone have a solution to my problem.
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#1971949 - 10/24/14 07:08 PM Re: Self Employed Borrowers reed3065
John Burnett Offline
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Delay tactics until he's been self-employed for 12 months?
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#1971950 - 10/24/14 07:08 PM Re: Self Employed Borrowers reed3065
John Burnett Offline
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Cape Cod
Or, more seriously, make a non-QM, but ATR-compliant loan.
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