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State of
Department of professional and
financial regulation
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Bureau
of Financial Institutions
36 state house station (207) 624-8570 (207) 624-8590 (FAX) Lloyd P. LaFountain, III Superintendent |
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Bureau
of consumer Credit Protection
35 state house station (207) 624-8527 (207) 582-7699 (FAX) William N. Lund Superintendent |
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December 26, 2007
Joint
Advisory Ruling # 113
Re: “Ability
to Pay” under Bureaus’ Joint Rule:
Guidelines for Determining Reasonable, Tangible
Net
Benefit and Ability to Pay (Chapters 550 and 144)
Dear :
This
is in response to your recent correspondence in which you seek guidance
regarding the "ability to pay" portion of the Bureaus' Final Rule
Chapter 144 (Bureau of Financial Institutions) and 550 (Bureau of Consumer
Credit Protection) (“the Final Rule”). Specifically, you have asked whether a
borrowers’ monthly payments to
third parties must be fully-indexed when determining the borrower's
debt-to-income ratio.
Subsection
5(2)(A) of the Final Rule provides that the determination of a borrower's
reasonable ability to repay a subprime mortgage loan must include, in relevant
part, consideration of "(5) the debt-to-income ratio of the borrower's
monthly gross income, including the borrower's total monthly housing-related
payments, all principal, interest, taxes and insurance."
Subsection
5(2)(B) of the Final Rule provides that creditors are to use certain
calculation assumptions in this evaluation, including in relevant part,
"(1) the monthly payment
amounts based on, at a minimum, the fully indexed rate, assuming a fully
amortizing payment schedule."
You
have pointed out that the Final Rule and the Bureaus’ responses to comments on
the Final Rule do not clarify, first, whether the debt-to-income ratio analysis
should include all debt-related payments of the borrower (e.g., secured, unsecured, credit card,
etc.), plus monthly
housing-related payments and principal, interest, taxes and insurance (PITI). You have indicated that you believe that the
standard industry analysis would include those other payments.
You have also pointed out that the Final Rule and the
Bureaus’ responses to comments do not clarify, assuming that the debt-to-income
ratio analysis should include all debt-related payments of the borrower, which
of those debt-related payments must be fully-indexed, and, if so, whether they
should be indexed in the same fashion as the subprime loan's monthly payment
would be fully-indexed per the Final Rule's instructions.
Letter to
December 26, 2007
Joint Advisory Ruling 113
Page Two
You
have urged us to take the position that a creditor should only be required to
"fully index" payments made to that particular creditor. You note
that a creditor does not have the information to "fully index"
payments made to a third party, as the creditor does not have the third-party
loan documents. By way of example, you note that, if a credit report shows a
payment to a third-party creditor of $400, and that payment is based on a
"teaser rate," there is no way for the creditor to know that fact.
Therefore, you argue that the creditor should be permitted to use the monthly
payment that the third party is reporting to the credit bureau.
The
Bureaus are of the opinion that the Final Rule’s “ability to pay” section
requires a creditor to consider both secured and unsecured debt payments in
calculating ability to pay, but permits that creditor to rely on reported
monthly payments to other creditors. We
will not require creditors to attempt to "fully index" payments that
may be due to other creditors in the future.
We
hope this is responsive to your request for our opinion on this matter.
/s/Lloyd P. LaFountain III______________ /s/ William N. Lund________________
Lloyd
P. LaFountain III, Superintendent William
N. Lund, Superintendent
Bureau of Financial Institutions Bureau of Consumer Credit Protection
