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#2141393 - 08/09/17 12:48 PM ATR on Primary - Also secured by 3rd party CD
fmissle Offline
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Registered: 07/20/07
Posts: 820
Loc: Pac NW
Scenario:

A builder's company (sole member LLC) is building a home that they intend to sell to their daughter. The daughter has no credit currently. She could probably qualify ATR wise with a 62 month balloon loan. The sole member (father) is willing to grant security interest in CDs equal to the loan amount and is also giving a $100M gift for the down payment.

For ATR purposes, can we rely on the CD collateral as showing ATR for the balloon payment? I tend to think no, since it's not in the daughters name.

I'm hoping to hear that yes, we can rely on that, but it just doesn't seem logical to me that we can.

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Ability to Repay/Qualified Mortgage Rule
#2142280 - 08/16/17 02:30 PM Re: ATR on Primary - Also secured by 3rd party CD [Re: fmissle]
RR Joker Offline
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Registered: 11/15/02
Posts: 19415
Loc: The Swamp
If it's hypothecated, I can't imagine why you couldn't. It's a sure-fire guarantee of payment. If I were making that loan, I'd likely give them a rate based on the CD as well...nothing beats cash collateral.
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My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

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#2142285 - 08/16/17 02:43 PM Re: ATR on Primary - Also secured by 3rd party CD [Re: fmissle]
fmissle Offline
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Registered: 07/20/07
Posts: 820
Loc: Pac NW
The issue is moot at this point, as the customer has decided to do cash secured and leave the house free and clear. And we had intended to do the CD + whatever %.

But it's still an interesting discussion point. Since our Borrower wouldn't be putting up the funds, I would say they shouldn't be used in the ability to repay calculation. On the other hand, if he transferred the funds to a CD owned by her (or by both of them even), then used that as the collateral I would say you can.

Thanks for the feedback though, I appreciate it.

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#2142308 - 08/16/17 03:26 PM Re: ATR on Primary - Also secured by 3rd party CD [Re: fmissle]
RR Joker Offline
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Registered: 11/15/02
Posts: 19415
Loc: The Swamp
I get why you are wondering, because on the one hand, it's secondary repayment much like a guarantor income would be. BUT, it's assuring repayment, whereas guarantor income is a little less predictable, IMHO. It would be much easier for me to renege on my signature...but there is no reneging a pledged cash instrument.
_________________________
My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

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#2142332 - 08/16/17 04:32 PM Re: ATR on Primary - Also secured by 3rd party CD [Re: fmissle]
fmissle Offline
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Registered: 07/20/07
Posts: 820
Loc: Pac NW
Yeah. I'm not sure this would come up very often and if it did again I still don't know what I would do.
I guess if we got them to qualify under a Balloon ATR it wouldn't matter anyway.

I AM however, jealous of the house that she's getting at a very, very attractive price.

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#2142391 - 08/17/17 11:42 AM Re: ATR on Primary - Also secured by 3rd party CD [Re: fmissle]
fmissle Offline
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Registered: 07/20/07
Posts: 820
Loc: Pac NW
Since the CFPB so helpfully created a form to submit regulatory inquiries, I asked them about this.
I'm sure they'll get back to me soon.
(where's the sarcasm smiley when you need one)

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#2143627 - 08/25/17 10:56 AM Re: ATR on Primary - Also secured by 3rd party CD [Re: fmissle]
fmissle Offline
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Registered: 07/20/07
Posts: 820
Loc: Pac NW
To continue on this thread, even though I'm past the ATR portion....

The customer came back and wanted to add the house as collateral. We discussed it and as we covered some of the compliance issues we'll have, I thought of another one.

Generally, when we have a CD secured loan, we'll make sure CD maturity does not exceed loan maturity. Just an easy way to make sure the CD isn't somehow redeemed while the loan sits out there. However, occaisionally we'll make exceptions for this and have an agreement prepared by our attorney when we do so....

BUT! Because the CD is actually a 1 yr. CD and the loan would be 62 mo, the rate will change, which makes this an ARM, and it would be an ARM with an Index under our control (because it's tied to the CD rate + Margin.)

We decided not to go that route. Stuff's to complicated sometimes.

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#2144002 - 08/29/17 11:46 AM Re: ATR on Primary - Also secured by 3rd party CD [Re: fmissle]
fmissle Offline
Platinum Poster

Registered: 07/20/07
Posts: 820
Loc: Pac NW
Following up again, I received a call from the CFPB, which they were clear to communicate is not official guidance and should not be relied upon.

With regards to a third party granted CD for the loan amount, she did not believe it would satisfy the ATR test. In her opinion, the collateral was not the consumer's and therefore couldn't be included.

She also, at first anyway, didn't believe that a CD owned and granted by the Applicant could be used to disregard the ATR. We went back and forth on that a little bit and I believe at the end I convinced/understood her to say that you still have to verify they can make the monthly payments, but that the CD could be considered as an asset with which the could repay.

I appreciated the call back, but I still don't really have a clear answer.

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