I have a loan officer asking if they can use a DSCR on a consumer purpose loan because the borrower is self employed with a large rental portfolio. My initial thought is no, because we need the DIR to determine ATR. Then my thought was since we are a small creditor and we followed the eight underwriting factors, we could make the loan even though the DIR would show in the LOS as an outrageous number.
All I can find about DSCR is that it is used for business purpose loans so now I'm back to no, because the loan would be a refinance on the borrowers primary residence.
And once the new rules go into effect in October, will the DIR/DSCR question even matter.
Any replies would be appreciated.
Thanks

How you choose to underwrite your loans is really a business decision. As long as you can prove ATR to avoid a lawsuit from the consumer would be the risk you would have to weigh.

However, loan underwriting needs to be done according to your board approved credit underwriting policies. A loan officer does not get to decide to underwrite one customer or one loan in a manner different from any other similar customer. That is the quickest way to a fair lending disaster.

What new rules are you talking about that go into effect in October?

For applications received on or after March 1, 2021 but before the mandatory compliance date of October 1, 2022, creditors that seek to originate General QM loans have the option of complying with either the revised, price-based General QM loan definition or the original, total monthly debt to total monthly income (DTI)-based General QM loan definition. Only the revised, price-based General QM loan definition is available for applications received on or after the October 1, 2022 mandatory compliance date.

Yes - the 43% DTI is gone after that date when the Legacy General QM sunsets, but ATR remains and does not disappear, only the hard and fast 43% is eliminated.

Correct, which brings me back around to a the DIR doesn't matter as long we we can prove the ATR.
Sounds like we just need to tweak our loan policy to include the use of a DSCR for self-employed borrowers.

What is DIR? and why would you ever use DSCR because someone is self-employed? Sounds like you want to re-write your entire loan underwriting policy for one borrower. Why are you using anything outside of Schedule.C and E for individual income purposes? I mean you are free to do whatever you want to, but if this is such an issue why is it coming up now?

DIR - Debt to Income Ratio, more commonly known as DTI - Debt to Income. But I somehow feel you already knew that. We do not want to re-write our whole policy for one borrower, we are always researching ways to better serve the people in our community. The loan officer asked me why we had to use two different methods to underwrite two different types of loans for the same borrower. For business purpose loans we use a DSCR - Debt Service Coverage Ratio which, from what I understand, includes an analysis beyond the Schedule C and E. I will pass on all the information I have gathered on to the loan officer and underwriter.
Thank you for taking the time to give us your opinion.

" The loan officer asked me why we had to use two different methods to underwrite two different types of loans for the same borrower. "

Because they are two types of loans. You do not use DTI in business lending, as it just does not work. You would never make a business loan based on DTI as most of your businesses would never be approved. Same thing with DSCR and consumer lending, you are not measuring the cashflows of a consumer in the same manner as a business. A good DSCR would be 1.25 and you would never make a consumer loan based on such a ratio.

Can you elaborate more on your thoughts on this or give specifics? We have had similar discussions recently as we frequently upset business members who are able to get approved for large business loans but struggle to get approved for other loans. If properly documented in our Board approved lending policy, why wouldn't we be able to use a DSCR for approving a portfolio mortgage for a business owner. I don't see any greater risk associated with personal mortgage than with the business real estate loan. From a regulatory perspective, ATR comes to mind....but i don't believe there is anything that requires use of a traditional DTI to prove that an application is compliant.

Eric, that's what we are trying to figure out. Our Lending Policy states that we will use a DSCR, when applicable. After talking internal this am, we believe that on a borrower whose income is solely derived from the business, it would be applicable. I was concerned about the DTI but we are following the eight underwriting factors to evaluate and demonstrate the ability-to-repay so we think we're fine. When I wrote the post I was at the point of researching and looking for guidance to see if anyone else was doing this. Especially since we just closed on a loan for a customer on a rental using the DSCR, however if we only use the Schedule C and E for his personal loan the DTI is enormous. How do you tell the guy, we're willing to lend to you on your rental but not your house.

How do you tell the guy, we're willing to lend to you on your rental but not your house?

Because you are usually requiring a larger down payment and on a business loan, you are always relying on the value of the collateral as a secondary source of repayment. From a business standpoint, if I am making a profit and can meet your DSRC, then you will make the loan.

That really has nothing to do with the amount of profit that specific asset will produce. I might have a multi-million-dollar portfolio of rental houses, but that does not mean it produces enough profit for the owner for them to afford their own $500,000 house.

If you choose to do this, then you better be doing it for everyone - and I mean everyone. You cannot underwrite some consumers on DTI and some on DSCR without potentially crossing the fair lending line, regardless of how they derive their income.