Forgive me if this is an elementary question, but I want to make sure I'm thinking correctly. A Small Creditor QM does not require employment verification other than what the bank would normally do within its own policy, correct?

Anyone?

For a small creditor portfolio QM under .43(e)(5), the creditor has to follow the requirements of .43(e)(2) except for (e)(2)(vi) [the 43% cap on DTI] and without application of Appendix Q. Paragraph .43(e)(2)(v)(A) requires that you verify the consumer's current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan, in accordance with appendix Q and paragraphs (c)(2)(i) and (c)(4) of this section."

Paragraph .43(c)(4) provides some instruction on verification, and includes a non-inclusive list of documents that can be used in that verification.

Thanks, John. So as long as we're verifying the income using any of those methods we don't have to verify employment as a separate step?

The way I read that is that you have to verify/document their income, but also document that they are actively employed at time of loan processing as well.

So, I'm curious if there are differing opinions on that piece.

Frankly, I don't understand why a lender would avoid the employment verification step. It seems to be a by-product of income verification, if current income is being looked at.

I understand what John is saying, but from what I read a Small Creditor is not required to perform or document a separate Verification of Employment. Is this not correct?

Specifically required, no.

However, specifically from the small creditor compliance guide from the CFPB: “For example, a consumer could claim that in originating the mortgage you did not make a reasonable and good-faith determination of repayment ability and that you therefore violated the ATR rule.”

As there has been no court cases to-date to set any sort of precedent as to what the courts may feel would be “a reasonable and good-faith determination of repayment ability”, I suggest that a bank (in order to reduce this risk) align its mortgage underwriting policies and practices to be pretty much inline with standard industry practices.

I'm with John. Why would any creditor balk at making it a standard practice? How can you verify current income without knowing whether or not they are currently employed???

Thanks for the response.

I agree with your stance on developing the underwriting standards. We are a small creditor that has been placing mortgages in portfolio for a long time. A majority of our loans are residential real estate with 15-30 yr terms. We are qualified under the small creditor QM. Our products qualify with all the QM standards ( negative am, prepayments, etc.). We require the signed tax returns and other various third party docs on income. We have never required the VOE. My question is it a requirement under the Small Creditor QM underwriting standards?

It is not a requirement, no. Good practice? Absolutely. Since I posed the original question, we have begun collecting employment verification on all our SCQMs. Has not been an issue with either or lenders or our customers. The only time we have a problem is in the case of self-employed borrowers, and then we have the tax returns to back us up.

Consider this scenario: An applicant for a $250,000 mortgage loan, which you'd like to underwrite as an SCQM, provides you with all the documents you ask for to back up her income for the three prior years, 2011, 2012 and 2013. It's now November 2014. There are no W-2s or 1099s, but you have seen a pay stub showing income through the end of October. Wouldn't it appear foolish to approve the loan without any to confirm the applicant is even employed? How would the board feel in March 2015 if it found out the applicant had been out of work since the end of October, and is now past due nearly 90 days on a brand new loan?

Sure, there's no guarantee that even a VOE will ensure continuing employment, but ...

Thanks for the input. Again I totally agree with the rational of what prudent lenders will do regarding verifications. I am trying to get a clear understanding between regulation requirements under SCQM and bank policy.

The basic question is whether or not a Small Creditor must adhere to the ATR Standard and the 8 generally required items or if by doing only SCQM transactions we are "only" required by Reg to calculate the DTI and verify that with third party documents?

You are asking questions that have yet to be determined within a court of law, as I said in my previous post.

I'm curious. How do you verify the applicant's current and expected income without verifying employment?

A current pay stub only tells you that the applicant received money in that pay period. It does not tell you that they are still employed and that you have a reasonable expectation of the income continuing.

Over the years I've dealt several times with factory closings and/or layoffs where people applied for loans and brought in their pay stubs and that particular pay stub was the last one they were going to be receiving.

BTW, in the definition of a small creditor QM in (e)(5) I really don't see an exemption from the ATR rules which include verification of employment. I do however see a couple of exceptions to the DTI requirements and the verifications of income and assets.

However as a disclaimer I am not a small creditor and have spent minimal reading concerning small creditor requirements.

What's the old saying, "a penny wise and a pound foolish"....well IMO you're a pound foolish if you do not verify employment for these loans.

Thanks again. I agree.

The newly released FDIC videos make it clear that if a small creditor takes advantage of the SMQM then the ATR 8 factors are not a regulatory requirement under the rule. Of course, as a internal policy we have always adhered to most if not all of them, including the employment verification. My take is our lending policies, procedures, and credit practices over the last 50 years have experienced no change from the ATR/QM rules. And these rules solidify that small community banks that originate and hold all mortgages (including 30 years) in portfolio should not experience any excessive change with these new rules.

https://www.fdic.gov/regulations/resources/director/technical/atr.html

Thanks for the link to those videos, Cajun Banker. They're a good refresher for all this.

Unless the bank had lousy underwriting and/or documentation. You would be surprised what is out there.

Exactly. But the focus for us can be on looking at our own practices and not looking to the regulation for the answers to improve our underwriting and documentation. It is up to us.