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#2248775 - 02/05/21 07:24 PM Minimum Loan Payments
Nicole Offline
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Joined: Nov 2018
Posts: 127
Looking for some guidance... Our lenders are thinking about setting a minimum loan payment for real estate loans. For example all real estate loans will have a minimum payment of say $500. Is there any regulations on this, can we do this? Will it cause a fair lending issue?

Any help is greatly appreciated!

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Lending Compliance
#2248776 - 02/05/21 07:31 PM Re: Minimum Loan Payments Nicole
Skittles Offline
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Skittles
Joined: Sep 2002
Posts: 13,963
TN
I have never heard of this. Do you know why they think this is a good idea - and will the DTI of all applicants allow this payment amount?
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#2248783 - 02/05/21 07:50 PM Re: Minimum Loan Payments Nicole
raitchjay Offline
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OK
I would worry about disparate impact on minority borrowers.
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#2248786 - 02/05/21 08:16 PM Re: Minimum Loan Payments Nicole
rlcarey Online
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rlcarey
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Galveston, TX
Yeah - building a business necessity case for that action would be difficult I believe.
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#2248788 - 02/05/21 08:28 PM Re: Minimum Loan Payments Nicole
Richard Insley Offline
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Richard Insley
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Toano, VA
I have more questions than answers, but can see one issue right away--unavailability of 30 year terms for your smaller loans. Look at your typical deals and see whether this practice could impact a significant percentage of your applicants.

Using a simple interest rate of 3%, a $100,000 loan would have 360 pmts of $421.60. After applying your $500 minimum payment rule, the loan could not have a term longer than 278 months. For lower IRs or loan amounts, the maximum term is even shorter.

At an IR of 3%, the break-even point is $118,595. What percentage of your new loans have principal amounts less than $118,595? All of them would have been disadvantaged by a $500 minimum payment policy. Now, look at the profile of that disadvantaged group--is it skewed in the direction of any of the protected characteristics? If yes, there's a disparate impact case to be considered.

Now, add another factor--secondary market requirements. Do your investors purchase loans with odd maturities, or only 20, 25, 30 year am schedules? If there's any restriction in your placement options, will this work to the disadvantage of the applicants subject to the minimum payment rule?
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