Chapter 34 — Exercises

Work these with a financial calculator or a spreadsheet. Where a problem gives you a program parameter — an expense factor, a divisor, a DSCR minimum, a maximum loan-to-value — treat it as given for that problem only. None of these values is standard, none is published, and inventing one for a real borrower is how loan officers get in trouble.

Items marked † have worked solutions in the answers appendix. No answers appear in this file.

A. Recall and definitions

34.1 In one sentence each, state what makes a loan QM and what makes a loan non-QM. Then state, in one further sentence, what obligation is identical for both.

34.2 A colleague says, "Non-QM is just stated income with better marketing." Write the three-sentence correction you would give them, naming the specific practice the Ability-to-Repay requirement ended.

34.3 List four reasons — none of them related to income documentation — that a fully documented loan to a strong borrower could be non-QM.

34.4 Define debt service coverage ratio precisely, naming both the numerator and every component of the denominator. State what a DSCR of exactly 1.00 means.

34.5 † A twelve-month business bank statement analysis shows the following. Derive the qualifying monthly income.

(a) What are total qualifying deposits? (b) What is the average monthly figure? (c) What is the qualifying monthly income? (d) Recompute (c) if the expense factor is 60% instead, and state the difference in dollars.

34.6 Name the one category of residential mortgage lending that is genuinely outside the Ability-to-Repay requirement, state why, and state the single fact that determines whether a particular loan belongs to it.

34.7 What is an ITIN, and what does not change about underwriting a file in which the borrower qualifies with one instead of a Social Security number?

34.8 Explain, in two sentences, why a prepayment penalty is essentially unavailable on an owner-occupied non-QM loan but common on a DSCR investor loan.

B. Qualify this borrower

34.9 † A DSCR file. Purchase of a single-family rental. Loan amount \$412,500.00 at 8.250%, thirty-year fixed. Taxes \$5,940 per year, insurance \$2,100 per year, HOA \$220 per month, no mortgage insurance. The executed lease is \$4,100.00 per month; the appraiser's market rent opinion is \$3,950.00 per month; the program uses the lesser of the two.

(a) Compute PITIA. (b) Compute the DSCR to two decimal places. (c) What monthly rent would the property need to reach a DSCR of exactly 1.00? Of 1.15? (d) Recompute the DSCR if the HOA were \$0.00, and say in one sentence what that tells you about buying condominiums with DSCR financing.

34.10 The same file as 34.9. The borrower says, "It cash flows — the rent is higher than the payment." Write the two-sentence reply that is both accurate and respectful.

34.11 A self-employed borrower's twelve months of personal bank statements show \$186,400.00 of deposits, of which \$41,000.00 are transfers from a brokerage account and \$7,200.00 is a tax refund. The program applies no expense factor to personal statements. Compute the qualifying monthly income, and state the single question you must ask this borrower before you rely on it.

34.12 A borrower's business bank statements average \$52,000.00 per month in qualifying deposits. Program A applies a fixed 50% expense factor. Program B will accept a licensed tax preparer's statement of the business's actual expense ratio, which is 41%. Compute the qualifying income under each and state which one you would pursue and why — including what it costs the borrower to pursue it.

34.13 † An asset depletion file. The borrower is 57 years old. Assets: \$95,000.00 in checking and savings; \$780,000.00 in a non-retirement brokerage account; \$450,000.00 in an IRA. The program's haircuts are 100% on cash, 80% on non-retirement securities, and — because the borrower cannot withdraw without penalty — 0% on the retirement account. The purchase price is \$480,000.00 with 25% down and \$16,000.00 of closing costs and prepaids.

(a) Compute total eligible assets. (b) Compute net assets available to deplete. (c) Compute the qualifying monthly income at divisors of 84, 120, and 240 months. (d) Recompute (a) through (c) at a 120-month divisor if the borrower were 60 and the IRA counted at 70%, and state the difference in qualifying income.

34.14 † A 1099-only file. The borrower's Forms 1099 total \$212,000.00 in the most recent year and \$188,000.00 in the prior year. The program uses a two-year average and applies a 20% expense factor. The borrower's Schedule C net profit was \$78,500.00 and \$66,700.00 for the same two years.

(a) Compute the 1099-only qualifying monthly income. (b) Compute the two-year average monthly net profit an agency-style analysis would start from. (c) Express (a) as a multiple of (b). (d) At a 45% back-end ratio with \$950.00 of other monthly debts, compute the maximum PITI under each and state the difference.

34.15 A borrower has \$8,400.00 per month of documented W-2 income and is buying a \$620,000.00 primary residence with 20% down. Their loan officer has quoted them a bank statement program because they also own a small side business. Identify what is wrong with this and state what you would do instead.

34.16 A foreign national is purchasing a \$750,000.00 second home. List six items of documentation a program is likely to require that would not appear in a domestic agency file, and state which single one most often delays these closings.

C. Structure the deal

34.17 A self-employed borrower needs \$14,000.00 per month of qualifying income to buy the house they want. Their business deposits average \$26,000.00 per month after exclusions. State, with arithmetic, whether any expense factor between 30% and 60% gets them there, and what your next move is.

34.18 An investor is choosing between a fully amortizing DSCR loan and the same loan with a ten-year interest-only period. List the four questions you would ask them before making a recommendation, and state which one you would ask first.

34.19 † Interest-only arithmetic. Loan \$525,000.00 at 7.750%, thirty-year term, with a seven-year interest-only period, then a recast amortizing the remaining balance over the remaining term.

(a) Compute the interest-only payment. (b) Compute the fully amortizing payment if the loan had no IO period. (c) Compute the payment after the recast. (d) State the size of the payment step at the recast. (e) State how much principal has been repaid at the end of the IO period, and how much total interest has been paid.

34.20 A borrower qualifies for a DSCR loan at a 1.02 ratio using the interest-only payment, and at a 0.96 ratio using the amortizing payment. The program permits qualification on the IO payment. Write the paragraph you would put in the file, and the sentences you would say to the borrower.

34.21 A borrower with a two-year-old business has twelve months of clean business bank statements and a prior year of tax returns showing a loss. Name three documentation routes available to them, rank the routes by likely cost to the borrower, and state which you would attempt first.

34.22 An investor wants to close a DSCR purchase in the name of an LLC. List five things that change about the transaction relative to an individual-vested closing, and name the day of the process on which each one will bite you if you forget it.

34.23 † Prepayment penalty arithmetic. A business-purpose DSCR loan of \$298,000.00 at 8.375%, thirty-year amortizing. The borrower refinances at month 24. The note carries a 3/2/1 penalty computed as a percentage of the unpaid principal balance.

(a) Compute the monthly principal and interest. (b) Compute the unpaid principal balance after 24 payments. (c) Compute the penalty. (d) Recompute the penalty under an alternative structure of six months' interest on the unpaid balance, and state the difference. (e) In one sentence, state why this loan may lawfully carry a penalty at all.

34.24 Design the exit. A self-employed borrower is closing a 24-month bank statement loan today. Write the four-line plan you will put in your database describing how and when this borrower gets into an agency loan, including what has to become true and who is responsible for each step.

D. Clear the condition / read the document

34.25 An underwriter returns this condition on a bank statement file: "Provide letter of explanation and supporting documentation for deposits of \$18,400 (month 4) and \$9,750 (month 9). Deposits exceeding the program's single-deposit threshold must be sourced or excluded." Draft the borrower-facing message you send, and list the two documents you ask for.

34.26 A P&L-only file: the third-party-prepared P&L reports \$396,000.00 of gross receipts over twelve months. The two corroborating bank statements show deposits of \$22,900.00 and \$18,600.00. (a) Compute the implied monthly receipts from the P&L. (b) Compute the two-month average of actual deposits. (c) Express (b) as a percentage of (a). (d) List four ordinary, non-fraudulent explanations, and state which document resolves each.

34.27 † A borrower has been quoted a bank statement loan at 9.500% on a \$340,000.00 thirty-year fixed. Your Chapter 32 cash-flow analysis of their tax returns produces an agency-qualifying income, and the conventional quote would be 6.875%. Lender charges are 1.25% origination plus 2.25 points on the non-QM loan, and 1.00% origination with no points on the conventional loan.

(a) Compute both monthly principal and interest payments and the difference. (b) Compute the difference in lender charges at closing. (c) Compute the total difference over the first five years. (d) Write the two sentences you would say to the borrower.

34.28 Read this term sheet excerpt and list every parameter you would still need before quoting.

BANK STATEMENT - 24 MONTH                 [constructed teaching example]
  Max LTV, purchase, primary            85%
  Min representative score              680
  Max DTI                               50%
  Reserves                              6 months PITI
  Expense factor                        per matrix
  Ineligible                            no

34.29 An account executive tells you, in a voicemail, that their program requires "no income docs at all — just the bank statements." Write the email you send in reply, and state what you do with the answer whichever way it comes back.

34.30 A DSCR file's appraisal returns with a Form 1007 market rent of \$2,150.00 against an executed lease of \$2,600.00. The program uses the lesser. PITIA is \$2,310.00. (a) Compute the DSCR the program will use. (b) Compute the DSCR the borrower believes they have. (c) Name the two remedies available and state the realistic outcome of each.

E. Judgment, ethics, and the Loan File

34.31 † Loan File extension. Return to the Chapter 34 counterfactual: the Linden Street file placed in a full-documentation non-QM program at 8.875% with 1.750 points and 1.000% origination, with taxes of \$385.00 and insurance of \$130.00 per month, an eight-day prepaid-interest period, a twelve-month homeowners premium of \$1,560.00, an escrow deposit of \$2,315.00, third-party costs of \$4,584.00, a \$5,000.00 earnest money credit and a \$3,000.00 seller credit. Now suppose the program's maximum loan-to-value were 85%, not 90%.

(a) Compute the loan amount and down payment. (b) Compute the principal and interest, and the total monthly payment. (c) Compute cash to close. (d) Compute the shortfall against \$38,000.00 of verified assets. (e) State, in one sentence, what this tells you about non-QM as a rescue for a low-down-payment purchase.

34.32 Your last twenty self-employed borrowers all closed non-QM. Write the one-page memo you would send your branch manager describing what you are going to change, what you will measure, and by when.

34.33 A borrower asks whether they could take title in an LLC on the house they plan to live in, so that the loan can be written as business-purpose and skip income documentation. Write your response, and then write the note you put in the file.

34.34 † A referral partner sends you a self-employed borrower and says, on the phone, "Just put them in a bank statement loan, they always work and they close fast." You run the Chapter 32 analysis and the borrower qualifies conventionally at a rate roughly two and a half points lower. The bank statement loan would pay you more and close a week sooner.

(a) State what you do. (b) State what you say to the referral partner. (c) State what goes in the file. (d) Identify which of this book's six themes is doing the work in your answer, and explain in two sentences why the commercial argument and the ethical argument point the same direction here.

F. NMLS-style exam questions

34.35 Under Regulation Z, a prepayment penalty may be included in a covered transaction only if the loan:

A. is a non-QM loan with a fixed rate B. is a fixed-rate qualified mortgage that is not a higher-priced covered transaction C. carries an interest-only period of no more than five years D. is secured by an investment property

34.36 Which of the following would, by itself, make an otherwise fully documented consumer mortgage non-QM?

A. A representative credit score below 620 B. A borrower who is self-employed C. An interest-only payment period D. A loan-to-value ratio above 95%

34.37 A lender makes a business-purpose loan to an investor to acquire a rental property, using only the property's rents to qualify. Which statement is correct?

A. The lender has violated the Ability-to-Repay requirement B. The loan is a non-QM covered transaction and the lender has no safe harbor C. Regulation Z does not apply, because the loan is not consumer credit D. The loan is exempt only if the borrower is an entity rather than an individual

34.38 A debt service coverage ratio is computed as:

A. net operating income divided by principal and interest B. gross rental income divided by principal, interest, taxes, insurance, and association dues C. gross rental income minus operating expenses, divided by the total monthly payment D. the borrower's total income divided by total debt service

34.39 Which statement about Ability-to-Repay is correct?

A. It applies only to qualified mortgages B. It applies to all closed-end consumer mortgages secured by a dwelling, including non-QM loans C. It was repealed for non-QM loans by the General QM Final Rule D. It permits a creditor to rely on the value of the dwelling as the primary repayment source

34.40 Under Regulation B, a creditor may consider an applicant's immigration status:

A. never, because immigration status is a prohibited basis B. only if the applicant is applying for a government-insured loan C. to the extent it bears on the creditor's rights and remedies regarding repayment D. only with the applicant's written consent