Remember when, often, the attitude was “If it isn’t written down, they can’t prove it?”
Now, of course, the rule is “If you didn’t write it down, you didn’t do it.”
And there’s a corollary:
“If you didn’t write it down, you didn’t do it correctly.”
In today’s world of consumer financial protection, documentation is the key to success. Without documentation, lending compliance falls into a black hole. In fact, lending decisions fall into a black hole.
A sea change in credit compliance
Why is documentation so critical to lending?
The importance of documentation goes far beyond preventing the problems caused by “no-doc” loans. It may seem, in a superficial way, that ATR and QM rules are a specific response to the problems resulting from no-doc practices. And they are.
But they are also much more.
The Ability To Repay and the Qualified Mortgage rules reestablish lending practices that worked. In fact, ATR is based on lending standards in use before mortgage lending became competitive and creative. The principles that underlie ATR and QM are tried and true.
However, there is a key difference: Now lenders have to prove that they use these principles. In order to prove compliance, you need proof: documentation of the information compiled and considered.
A handy basis for improving compliance operations
ATR and QM provide a good foundation for documentation. ATR provides a list of information that should be collected and considered—and documented. But the utility of documentation is much greater than ATR and QM. Beginning with the Home Mortgage Disclosure Act, good documentation provides the information needed for compliance.
HMDA requires reporting of information relating to the loan, including the income considered. This has to be accurate—the income actually considered.
Just for “fun,” pick up a few loan files.
Work through them and see how many times you can find a figure for the applicant’s income. How many of those figures differ from each other? Which was the number actually considered? Which one is the one to report on the LAR? (Hint: The income amount used to make the decision.)
There is a lot of information in addition to income that must be reported. But this is only the HMDA of today. Things will get much more complicated when the CFPB issues expanded HMDA rules.
Then there are Truth in Lending disclosures, followed closely by—and soon to be combined with—Real Estate Settlement and Procedures Act disclosures. Early disclosures, updated disclosures based on changed circumstances, and final disclosures all must be accurate and timely. Accuracy of disclosures depends on the information used to prepare the disclosures—documented information.
And if circumstances change, whether it is a change in the borrower’s income or the value of the property, that information—and the date it was learned—become the basis for revised disclosures.
With a good starting point established by ATR, and good documentation of any changed circumstances—also important for ATR—compliance is easily demonstrated. Better yet, decisions can be consistent and easily explained when someone comes asking questions.
Then there is fair lending. The fundamental question in fair lending is whether applicants of different identities were treated differently on that basis. In order to accurately compare the qualifications of applicants, there must be information about their qualifications—documented.
Again, good documentation practices make all the difference.
OK, we get it Lucy. How do we get it?
These examples illustrate how useful good compliance with ATR and QM can be.
So now the question is how to prepare the documentation, keeping in mind that documentation should be consistent in every loan file.
The answer? Worksheets.
In fact, worksheets used to be the norm. Loan officers used to have worksheets on which they wrote down their calculations and recommended decisions. There may still be some sitting around in very old files, but be careful. Some of those old worksheets did not comply with Regulation B—especially the ones that called for discounting the wife’s income. The practice of using a worksheet, however, is a good one.
Start with a log on which the loan officer or other staff writes down everything as it happens. This isn’t hard. A date and a phrase are all that is needed: “3/20/14-Received income verification from employer.” And, somewhere in the file should be the verification form returned by the employer. Use the ATR rule to identify information that must be collected and documented.
Then consider the use of combined worksheets—up-to-date ones, that is. Many lenders use a worksheet to compile information for HMDA data collection or the Community Reinvestment Act program. Expand the information on this and you may have what you need for ATR documentation. There is really no reason why these need to be separate. If the lender’s worksheet has the information that HMDA requires, the worksheet can serve multiple purposes.
Log sheets and work sheets are important—so important, in fact, that they shouldn’t be printed on regular paper. These are documents that should be easily found—especially when examiners are looking. So print up these sheets on a bright-colored paper. Neon lime works well.
So, the bottom line is that compliance with ATR can have many benefits.
Don’t be afraid of it. Do it.