The importance of professional underwriting to qualify your borrowers and stay Federally Compliant

At Call the Underwriter, LLC we specialize in helping you screen your borrowers to ensure they meet the mandatory Dodd-Frank Ability to Repay (ATR) requirements.  This process saves you time, money, and potential liability.  Our process is designed to ensure that your notes are compliant, that your borrowers are unlikely to default in the future, and that you end up with an underwriting retention file that will attest to your professional, consistent note creation process.

While there are many complicated aspects to ensuring Dodd-Frank compliance on your notes, Call the Underwriter, LLC (CTU)  has a scientific, streamlined approach to doing this for you.  We make the process easy, and we offer free coaching in the process.

For anyone new to note creation, you might wonder how Dodd-Frank affects you and why you should care about professional underwriting for all your notes.  Simply put, Dodd-Frank legislation, first enacted in 2010 after the housing bubble burst, mandates that the lender for any Owner-Occupied property (1-4 family) ensure the borrower meets the Ability to Repay (ATR) requirements.

The Consumer Financial Protection Bureau (CFPB) acts as the enforcement arm for Dodd-Frank compliance.  The CFPB can levy fines up to and including 25,000 per violation.  Their penalties can result in rendering the note null and void and awarding the asset to the borrower.

In considering Dodd-Frank compliance it’s critical to understand the spirit and intent of the legislation.  Dodd-Frank was born in an attempt to prevent the predatory, risky lending practices of pre-2008 that directly contributed to the housing bubble burst and subsequent “Great Recession”.  In response to this crisis, in 2008 the Federal Reserve Board adopted a rule under the Truth in Lending Act (TILA) which prohibits creditors from making “higher-Priced Mortgage Loans” (HPML) without assessing the consumer’s ability to repay the loan.  An HPML is defined as any home loan with an interest rate 1.5% higher than the Average Prime Offer Rate (APOR) or Fannie & Freddie street rate of the day.  Virtually all seller-financed home loans are HPML.  For example, if today’s APOR is 3.25 percent, then an HPML loan would be any rate of 4.75 percent or higher.

With that knowledge in mind, understand that Dodd-Frank and CFPB are both very borrower (victim) centric.  As a note originator/lender, you are mandated by this legislation to adopt and maintain lending practices that demonstrate the utmost concern for your borrower’s welfare.

Throughout Dodd-Frank legislation several consistent themes are prevalent.  The authors frequently state that lenders must “utilize underwriting practices that result in historically low default rates”.  Additionally, the legislation is peppered with the standard of care expectation being that the lender “make a good faith effort to ensure the borrower has the ability to repay”. 

“Good faith effort” is an implied contractual term and it is defined as “what a reasonable person would determine is a diligent and honest effort under the same set of facts or circumstances.” Troutt v. City of Lawrence, 2008 U.S. Dist. LEXIS 61641 (S.D. Ind. Aug. 8, 2008)

What does it look like to apply a Good Faith Effort to ensure your borrower has the Ability to Repay (ATR)?  Ensuring ATR for your borrower consists of eight general categories that must be considered in your Good Faith Effort to evaluate your borrower’s eligibility for a loan.  The legislation says that you must, at a minimum consider the following factors:  (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loans; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio with state-specific residual income; and (8) credit history. Creditors must generally use reasonably reliable third-party records to verify the information they use to evaluate the factors.

That’s a mouth full for sure.  Not to worry though; this is the sole focus of Call the Underwriter, LLC.  We take a very scientific approach to performing the necessary due diligence and compiling the proof into a retention file that will defend your actions for years to come.  Remember this; as they say in court, “if you didn’t write it, you didn’t do it”.  At the conclusion of our underwrite for you, we hand you a professional underwriting file that shows specifically each metric measured and you will retain the documents to prove it.  The Consumer Financial Protection Bureau (CFPB), the enforcement arm of Dodd-Frank states that you must be capable of “reproducing all documents used in determining your borrower’s ATR” for the statutory three-year period after loan consummation.  The package we produce for you will enable you to do this easily if ever needed.  We essentially underwrite to the same standards that the Fannie & Freddie conventional lenders are writing to.  This assures that your loan origination processes will be consistent, on par with other professional loan underwritings, and will demonstrate obvious respect for the Dodd-Frank intent.

Let’s break down the criteria that you are required to consider in determining your borrower’s Ability to Repay the loan.  First, you must look at their current, or reasonably expected income or assets.  Industry-standard for this is to review a two-year work/income history for each borrower.  Historically, we use the most conservative income expected in the future based on what we see in their work/income history and present income position.

Next, you must review their current employment/income status.  You cannot credit a borrower for the income they no longer have, or for income that is not reasonably expected to continue for the next 3 years.  We expend great energy reviewing your borrower’s income expectation and make every effort to ensure it appears likely to remain solid into the future.  Note:  You are not responsible for a borrower’s failure to maintain Ability to Repay (ATR) if they lose or quit the job you used to qualify them with.  If a borrower loses their employment subsequent to your loan and defaults, you will only be responsible to prove that they met ATR requirements at the time of loan consummation or loan approval.

You have to consider the monthly payments on the transaction you are doing with the borrower.  This includes the entire PITI of the deal, as well as any possible HOA’s or flood insurances, etc.  We will ask you for all the details of the transaction you are doing at the time we begin the process for you.  To make it more consistent and streamlined, we have developed a “TERM” sheet that you will complete with each loan submission to us.  That document will allow you to capture all the necessary data we’ll need related to the terms of your current deal.

CFPB requires you to evaluate all other debts your borrower or co-borrowers may have.  To do this, we have them complete the loan declarations on the loan application and sign the bottom statement swearing that they have answered all questions honestly.  Then we get a signed authorization from them allowing us to pull their credit reports.  We enter all debt shown on their credit report into our calculations to reflect an accurate debt to income ratio (DTI).

As mentioned above, you must include consideration for all monthly expenses related to the loan you are making.  That is included in the PITI, plus HOA and flood insurance mentioned above.  Additionally, you must consider any judgments, government loans (student loans), and court-ordered payments such as Alimony or Child support.

After determining all possible debt your borrowers may or may not have, you need to plug all that in against the most conservative income figure you have credited them with for joint gross monthly income.  You then must determine their Debt-to-Income ratio and consider their state-specific residual income requirement also.

Lastly, you must review their multi-year credit history and consider their creditworthiness for a home loan.  This is the most time-consuming process as it’s critical to review all open lines of credit, all collections, delinquencies, and charge-offs.  Creditworthiness is generally considered having multiple open lines of credit in good standing for 24 consecutive months at the time of loan approval.  In the absence of this, we get creative for you and help your borrower develop alternative credit (see alternative credit list on our website under investor tools. We ensure that we are able to develop a 24-month positive credit history for your borrowers before issuing loan approval.  We also address all negative credit (open collections, current delinquencies, etc.) and require the borrower to bring them current or pay them off before loan approval.  This can take some time and when we encounter these challenges, we bring them to you and discuss what needs to be done in order to help your borrower be deemed creditworthy. (see “understanding loan conditions” on our website under the investor tools tab).

As complicated as this whole process sounds, and it is, we can generally perform an entire underwrite and get a decision back to you within about 2 business days from the time we receive a complete loan submission from you and the borrower.  After the thorough review process described above, we will “decision” the file.  We typically end up with one of three decisions which we share with you.

The most common decision in the seller finance demographic is “Approved with conditions”.  This means we have determined that the borrower has adequate work/income history and has adequate gross income to support the new debt.  However, there are some issues that must be addressed before it would be prudent to issue this loan to the borrowers.  (see “understanding loan conditions).  In this case, we list and explain all the conditions that the borrower must meet before loan approval.  We share this with you and the borrower.  Once this happens, the clock stops until the borrower can meet the conditions and return the necessary proof to our team to clear the conditions. 

Occasionally, a borrower is very clean and we can issue loan approval as soon as we are finished with the underwriting.  When this happens, we issue the approval and the Initial Loan Disclosures to you and your borrower.  The Initial loan disclosures are the 25-30 pages of federal disclosures that you are required to provide to your borrower explaining the costs of credit and all other factors that the government requires you to disclose for every loan you originate.

The last possible decision we make is a loan suspension or denial.  This happens when we determine that there is no way this borrower can meet the Dodd-Frank requirements for Ability to Repay (ATR).  There can be a range of factors that render the borrower ineligible for the loan.  It could be that they simply do not have adequate income to support the new debt.  When this is the case, we will offer creative solutions if possible.  For instance, we might tell you that the borrower is 200 per month short of making DTI or residual income and your options are as follows:  Either have the borrower bring a well-qualified co-borrower to add additional income.  Or, perhaps we recommend that you take a bit more in down payment, to drop the loan amount.  Possible also, would be that you increase the loan term or reduce the interest rate.

When these situations happen, we will be able to tell you the exact dollar what your borrower is qualified for.  This is very valuable information for you and them because now you can always go back to them and help them find another property or deal that will fit within the payment parameters that we give you.

Another possible scenario where we cannot approve a loan would be for a borrower that had conditions they could not, or would not remedy.  Frequently, we condition a loan for credit problems such as open collections or current loan delinquencies.  These conditions require the borrower to either make a payment plan with the creditor and return the proof or to pay the debt in full and provide proof.  Occasionally we get a borrower that cannot or will not do what is required to resolve creditworthiness issues.  When this happens, sometimes a loan cannot ultimately be approved for those borrowers.

On our website under “investor tools” (, we have a list of questions to ask every borrower.  That resource is very important in your borrower pre-screening process.  Asking those questions will typically weed out the borrowers that would not be able to meet Dodd-Frank requirements.  We find that our investors who utilize our resources and implement them into their borrower screening processes typically have very low loan denial rates.  Additionally, if you are screening borrowers and encounter scenarios you need to ask us about, we are open to phone calls and coaching sessions to help you make the best choice possible before sending a loan package for review.

While ensuring Dodd-Frank compliance for your notes is a serious responsibility; it is not something to scare you off of note creation.  At Call the Underwriter, LLC, we specialize in walking you through this process and our comprehensive system makes the process very quick and easy for you and your borrower.  Before you begin your next deal, go to our website ( and review all the information in the Investor Tools tab.  Feel free to call me with questions after reviewing the materials, and together we can help you get your deals done professionally and quickly.

Note Investing Tools Interview: Call The Underwriter RMLO


How do you create notes and stay compliant? Call The Underwriter! Note Investing Tool interviewed Russ O’Donnell, an experienced RMLO, to see how he is helping sellers provide financing in all 50 states with his underwriting and disclosure services.

5 Keys to Staying Dodd Frank Compliant

Get Dodd-Frank Compliant

In a Seller Finance Transaction

Staying Compliant, as a lender, in today’s litigious society can be like walking through a minefield. One wrong move and you can say goodbye to your assets. These 5 keys will not only help ensure compliance with Dodd Frank, but help provide the best overall customer experience for your new buyer.

1. Becoming, or hiring, an RMLO (residential mortgage loan officer) – it is highly recommended that you contact an attorney to determine your specific needs as an investor in this area. In general, the SAFE ACT requires a person originating more than 5 loans in a 12 calendar month period to be a licensed RMLO, or hire such a person/entity. 5 loans or less, no license required. However, you are still responsible to follow all disclosure (RESPA), and both state and federal lending laws. Once the loan terms have been agreed upon between you and the buyer, you can proceed.

2. Complete Loan Application – Success in life is foundational. The 1003 mortgage loan application is the foundation to your seller-finance transaction. It will help you determine, quickly, whether you or not you have a potential buyer, or someone you’re about to waste a lot of time with. The key is to have the buyer fill it out. All of it. 2 years residence history, and 2 years employment history. No gaps. No blank spaces. Make sure it’s legible. All pages.

3. Key Questions – asking a few very basic questions is essential in vetting a potential buyer:

“Have you been current on all housing payments over the most recent 12 months?”
If the buyer says no, and doesn’t have an acceptable explanation, you need to move onto the next applicant. Prior rental history is very important. If the buyer says yes, ask them if it can be verified by their landlord. If the buyer says no, you need to move onto the next applicant. If the buyer says they live with their family and don’t pay rent (unless they just sold a home or recently relocated) you may need to move onto the next applicant.
“What’s preventing you from obtaining an FHA or Conventional loan?”
If the buyer says it’s due to credit, ask them what’s wrong. You’re trying to find out if it’s a recent life event, such as job loss, divorce, etc., or if they just don’t like paying people back. If it’s the latter, you need to move onto the next applicant.
“How do you earn income, and can it be verified in writing?”
If the answer is clear, and they are willing to provide recent paystubs and W2s (or tax returns if self employed) that’s good (see our CTU Submission Checklist on exactly what documents to collect depending on how they earn income). If they indicate they get paid in cash, you need to move onto the next applicant.

4. Collecting Income Documents – following the CTU Submission Checklist will make gathering buyer income documents very simple. This will also ensure you’ve collected exactly what is required by Dodd Frank and the CFPB to accurately determine the buyer’s Ability to Repay to proposed loan.

5. Credit Report – we strongly recommend that seller financiers pull a credit report and review it with the buyer. Dig in and ask questions. While some issues are expected (after all, they are coming to you because they don’t qualify for traditional financing), serious delinquency must not be ignored. For example, if the buyer is 2 months delinquent on an open car loan, how can they possibly be in a position to buy a home? This is how you get the whole story, which is needed before you go into a long-term agreement with a potential buyer.

Assuming the buyer makes it through step 5, you’re now ready to underwrite the potential loan. What? You’re not an underwriter? You thought hiring an RMLO is all you needed to do to be compliant? Listen, RMLO’s are not underwriters. They’re sales people.. just like you. An RMLO is required (unless you’re licensed) to help you originate the loan. You still need to have it underwritten to ensure the buyer can actually afford the new payment. This is call ‘Ability to Repay’, or ATR as the CFPB likes to call it. And, if you don’t certify the buyer has it, then, in the event of default, you risk having your lien invalidated should you try to foreclose and the buyer hires a smart attorney.

Questions? Contact us or call us at (480)388-6018

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Tips For A Fast Underwriting

How long does underwriting take? Underwriting—the process in which mortgage lenders verify your assets to get a home loan—can last a little as two to three days, but typically takes over a week to finish.

Underwriting happens right before you close on a house, so timing can be crucial, particularly if you want to move in by a certain date. But make no mistake: Underwriting is unavoidable. All loans go through an underwriting process before the lender can promise you the funds for a purchase.

Learn from Russ O’Donnell, CEO of Call The Underwriter, how to speed up the underwriting process. He’ll take you through the steps in just over 4 minutes.

CFPB Changes its Mission Statement

CFPB Acting Director Mick Mulvaney has officially changed the Bureau’s mission statement.

The mission statement had previously read: “The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.”

But the new statement, according to a report by, reads (with italics added to the new wording): “The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations, by making rules more effective, by consistently enforcing federal consumer financial law, and by empowering consumers to take more control over their economic lives.”

Mulvaney has indicated he aligns with President Trump’s mission to remove unnecessary or burdensome regulations, and while the recent Dodd Frank rollback did little to help private lenders and investors, it was certainly a step in the right direction.
Prior to Mulvaney’s appointment to the CFPB, the bureau made a name for itself by assessing mega-fines to mortgage lenders and real estate brokerages topping 5 billion dollars. Recent pushback from CFPB defendants has resulted in 2 federal judges ruling that the

CFPB’s structure is unconstitutional. Perhaps Mulvaney is on our side.
If Mulvaney hold true to his words, perhaps this could be the start of something big. And not just for big business.


How to Play Nice with Dodd Frank

As with all legislation, there is the issue of interpretation. In this entry, we will drill down, quickly, what the Dodd Frank Act did, why it did it, and how to comply with it as an investor or private lender.

Dodd Frank’s 849 page lending overhaul, as we’ve all seen, made it mostly impossible for smaller lending entities to stay in business. This is because it transferred the responsibility of the buyer onto you, the lender. If the buyer defaults on a mortgage loan, and it can be determined that the lender didn’t make sure the buyer had the “ability to repay” at the time of loan origination, the lender could lose their right to foreclose. This was done to try and protect the consumer against a crooked mortgage loan officer. As a result, many private lenders and investors abandoned residential, seller-financing all-together, and have long awaited repeal or new legislation to reopen the door. Trump’s recent lift did quite a bit for smaller banks and credit unions, but still requires them to service those loans and ensure their borrowers still qualify.

So how do I get back in the seller-finance, or note-buying game and stay compliant? 2 answers.

1. SAFE Act – This is the law that says you need a Mortgage Loan Officer (MLO) to originate the loan between you and your buyer. Note that if you are doing no more than 3 per year, there is an exemption to this requirement. You can find an MLO in any state by simply accessing their registrar of loan officers, or by using an entity that originates in all 50 states.
2. Ability to Repay – Dodd Frank states the lender is responsible for making sure the buyer can repay their loan. While it doesn’t tell you what interest rate to charge, or how high of a debt ratio is too high, it does recommend a few things. In fact, the CFPB issued a 59 page guide to help summarize the ACT’s requirements and how to comply. We keep a free copy of that guide on our website here, and use it regularly during our Compliance reviews. Dodd’s biggest question, during an audit, is going to be, “What underwriting methods did you use to ensure the buyer had the ability to repay your loan?” That’s it. Short and sweet. If you can’t answer that, or don’t want to become a mortgage underwriter, then simply hire one familiar with Dodd Frank.

Lastly, don’t confuse using an MLO to underwrite the transaction or to ensure your buyer has the ‘ability to repay’. That’s the underwriter’s job. MLO’s originate for food, commission, clams, Benjamins, and greenbacks. They are not underwriters and aren’t typically familiar with guidelines. They are salespeople. MLO’s help you to comply with the SAFE Act, underwriters help you to comply with the Ability to Repay. You need both.


Dodd Frank Gets a Trimming

The amendment to Dodd Frank in April brought a well-needed lift to small banks and credit unions by alleviating certain ability-to-repay requirements.  Assumedly, private lenders and investors could fall into this category of creditor, however, would still be held to the original points and fees thresholds, retain servicing, and required to verify debt, income and financial resources of the borrower.   While some say it’s not much of a lift, hopefully this will be the first of many more adjustments to come.  To view the new legislation, click here.