Are Stated Income Loans Illegal In Nevada? NO! A Letter From Our Mortgage Lending Division Commissioner

I have gotten a lot of calls in the last few weeks from very nervous real estate agents who have asked me if stated income loans will become illegal in Nevada as of October 1, 2007 when the new Nevada Lending Law goes into effect.    

Others have told them that they will be illegal and they are panicked.

These agents are wondering if they need to start looking for other careers as stated income loans are so prevalent in our city due to the number of "tipped" employees we have.

The answer in "NO!"  Stated income loans are not illegal and will not become illegal when Assembly Bill 440 (Nevada Lending Law) goes into effect on October 1, 2007.

In a letter dated, Thursday September 13, 2007 to all Mortgage Banker and Broker Licensees from Joseph L. Waltuch, Commissioner of the Mortgage Lending Division in Nevada, he confirmed this.   

Here are some parts of his letter.  

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EXCERPTS FROM THE LETTER FROM COMMISSIONER WALTUCH:

The Mortgage Lending Division (the "Division") has become aware that there exists some confusion amongst licensees regarding certain amendatory language to the new Nevada Lending Law.

Effective October 1, 2007 it will be an unfair lending practice for a lender to:

"(b) Knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower, including, without limitation, a low-document home loan, no-document home loan or stated-document home loan, without determining, using any commercially reasonable means or mechanism, that the borrower has the ability to repay the home loan."

Many licensees have expressed concern as to the meaning of "commercially reasonable means or mechanism" in the context of determining that the borrower has the ability to repay the home loan.

This does not prohibit specific mortgage products or types of documentation that may be utilized in the making or underwriting of home loans.

Instead, the new law recognizes, and specifically defines, "low-document", "stated-document" and "no-document" home loans.

What all of these definitions have in common is that they specifically pertain to the borrower establishing his or her ability to repay a home loan, in other words, what income and asset documentation, if any, the borrower may submit to prove his or her ability to repay.

These definitions do not address the lender's obligation to verify the accuracy of the information the borrower has submitted or otherwise determine the borrower's ability to repay.

The Division believes it means that licensees must inquire into a borrower's current and future income and financial status, but without dictating what specific methods must be utilized as long as they are reasonable and frequently used within the lending community.

Licensees should meet with their borrowers [that means all borrowers obligated on the particular loan] in person, over the telephone, or in other ways where personal contact is achieved, and discuss their economic situation, including their employment, credit history, current sources and amounts of income and assets, and the likelihood of any of these items changing [up or down] in the reasonably foreseeable future. While no particular time span is contemplated, for purposes of this guidance, the reasonably foreseeable future should at least encompass a time span past the first adjustment date of a variable rate home loan.

Licensees must verify the information that the borrowers provide. The Division recognizes that there are some general sources, such as Salary.com or the Department of Labor, which may be utilized to verify income in those situations where verification of employment, pay stubs or tax returns are not utilized.

Licensees who in good faith complete this worksheet, or a similar worksheet that properly documents the discussions and verifications, for all home loans funded on or after October 1, 2007 will be deemed for examination purposes to be in compliance with the "commercially reasonable means or mechanism" provisions of the new law.

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The Commissioner also presented a worksheet that the Division recommends that all brokers and bankers use on lower documentation loans.   It looks like this:

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THE RECOMMENDED WORKSHEET FROM THE DIVISION:  

To the Borrower: Commencing October 1, 2007 Nevada Revised Statute 598D.100 requires the mortgage broker or mortgage banker named below to use any "commercially reasonable means or mechanism" to verify that you have the ability to repay the home loan for which you are applying.

There is no requirement that you enter into any proposed loan transaction even though you may have submitted an application to the broker/banker. Be sure that all of the terms set forth below are accurate and that you agree to them.

To be completed by Borrower [complete as applicable]:

The purpose of this loan is to _____ purchase a home or _____ refinance a current home loan.

The loan is a _____ fixed rate or _____ adjustable interest rate loan.

My monthly pre-tax income is $____________. I _____have or _____have not submitted pay stubs or tax returns to the mortgage broker/banker as proof of this income.

The mortgage broker/mortgage banker has discussed with me:

_____ My overall economic situation

_____ My employment, including length of time on job and prospects for its continuation in the

future

_____ My credit history and credit score

_____ My current sources and amounts of income and assets, and the likelihood of any of these

items changing [up or down] in the reasonably foreseeable future

_____ The information required on my loan application

_____ That if I have applied for an adjustable rate loan, the interest rate may increase and my

monthly payments may go up substantially on and after the first change date

_____ Other: List ______________________________________________________

I certify under penalty of perjury that I have the financial ability to repay the loan I have applied for. I have carefully reviewed any and all rate loan disclosures that have been provided to me, and agree that even if the interest rate on my adjustable rate loan increases and my monthly payments increase as result, I can still afford to repay the loan.

_____________________ _____________________ ______________________

Borrower Signature/Date Borrower Signature/Date Borrower Signature/Date

To be completed by mortgage broker/mortgage banker:

This is a:

_____ Full document loan

_____ Low document loan

_____ No document loan

_____ Stated income loan

_____ Other [describe]_________________________________

I have verified the income amount provided by the Borrower by:

_____ Salary.com

_____ U.S. Department of Labor

_____ Other: specify [i.e. VOE, pay stubs] ________________________________

I have also discussed with the Borrower the items s/he has checked above, and have given him/her a completed copy of this worksheet.

I certify under penalty of perjury that the above is true and correct.

Name of Mortgage Broker/Banker: ____________________

License Number: ____________________

By:

Signature Date

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At the end of the day, this is a law meant to protect consumers from unethical loan officers who inflate the borrower's income to simply get a loan through, without the borrower's knowledge.  

These loan officers did not effective explain to the borrower the potential negative consequences of this action, and today, hundreds of thousands of foreclosures are occurring, in part, because of this.

This law allows for stated income loans but it also makes sure the borrower understands what he is stating and that he understands the terms of his loan.

I love the worksheet.  I think it protects, not only the consumer, but the loan officer as well from a client calling when his ARM adjusts to say "I didn't realize that would happen.  You didn't explain it properly."

It's a good law whose time has come and it will not impede your real estate business much, if at all. 

For consumers, I think this is great protection for you to ensure you get what you want and are not taken by an unethical loan officer.

This law will get rid of even more unethical loan officers.  Many of us have had our fill of them for a while as we now have to deal with the mess they left us. 

Some tough lessons have been learned in 2007.   This will help ensure they stay learned.