Bank Statement Loan Programs. Can we? Should you?
Updated: Apr 12, 2019
This is a complicated topic. Indeed, there has recently been an abundance of "marketing" for so called "Bank Statement Loan Programs" coming mostly from "non-brand-name" pass-through lenders. To our knowledge, there is no mainstream brand-name lender who is (yet!) offering such a loan program.
So this REALLY comes down to semantics.... the careful use of words to "market" something...where the Devil is in the Details! Like with ANY marketing semantics: Caveat Emptor (buyer beware)! Read the fine print! You don't want (for you or for your client) to get "ripped off" in the end.
What do I mean by this?.....
What is buried in these "alt doc" programs now being offered is one simple little nuance: whether you (and the borrower, whom you are the "agent-of", as their MLO) will be required to make a material misrepresentation on a Federal Loan Application, in order to obtain a loan approval.
Asserting ANY income amount that is not supported by an IRS-4506 (reported taxable income) on a 1003 is a clear and known violation, and the source of ACTUAL and RECENT legal actions against Loan Officers, Brokers, and Borrowers. There is a pending legal matter on this EXACT claim of "mortgage income misrepresentation and fraud", amounting to at least hundreds of thousands of dollars in damages, plus legal fees, sitting on my desk right now, dated March 6, 2019! So, this is not just some theoretical philosophical concern. This is a very real, current, and active problem that is presenting itself in real time!
Simply speaking....this question might as well be "worded" (again, semantics) as follows: "Who are we using for falsifying material facts about the income of a borrower in order to get a loan approval?" And of course the answer to THAT question is: "NO ONE, because its unlawful!"
It's sort of a "no brainer" when you use those words.....right?
But, lets not OVER-simplify the question....to be fair.
What is unlawful is the act of asserting false material facts (in this case, the reported taxable income of a borrower) on a Federal Loan Application. It is a well established FACT that the Federal Government and the Banking System does not recognize this form of "alternative income documentation" as a facet of loan qualification. The 1003 demands that the true and accurate taxable income (supported by official records) be reported by the borrower and his/her Agent (the MLO). Remember....in any real estate transaction (sales or loans) there are "principals" and their "agents". Under the law, Agents represent the actions and assertions of their principals, as if they are one and the same. So if you, as the MLO, make an assertion on behalf of your principal, it is one and the same as the client having made it himself, under the law. Thus, what you put on the borrowers Federal Loan Application is very consequential!
Therefore.... ANY loan program should allow you and the borrower to accurately report the taxable income on the application! If the underwriter still elects to focus on "alternative income documentation" as the qualifying criteria...then there should be no problem with moving forward to a closing of that loan. In this scenario, absolutely no misrepresentation has been made, and the choice to rely upon "alternative income documentation", such as averaging bank statements over a period of time, is at the sole discretion of the underwriting-lender. THIS is a safe and lawful practice! The borrower and the agent (MLO) did their licensed duties, and accurately reported the true taxable income on the loan application!
However, we are unaware of any lender, to date, that will allow this most fundamental practice when making a "bank statement loan". What we find is that lenders are asking "YOU" (read: your individual license/NMLS, WWCC as your supervising broker, and the borrower/principal whom we represent) to *resubmit* the loan application asserting the "averaged income derived from the bank statements", instead of using an accurate reporting of the taxable income found in official records. Rather than taking it upon their own sole discretion to rely upon "alternative income documentation".....the Lender is passing the buck onto YOU (and your broker and the borrower)...and asking you-all to misrepresent on the Federal Loan Application what the true and accurate taxable income actually IS. Only then will they approve the loan!
And sure... at that point, once you've made this false-assertion in writing, only THEN are they willing to move forward to a closing. And this is so obvious, its stunning. They are NOT willing to move forward to a closing WITHOUT your false-written-assertions, because then the liability for any default or legal action would fall upon THEM. If you are willing (or uninformed enough) to give them a false-written-assertion, THEN they are more than willing to move forward to a closing, leaving all of the potential liability upon you, your broker, and your client. Again....Stunningly Obvious!
And by its very nature, this is NOT the definition of an "alternative income documentation LOAN PROGRAM". An actual loan PROGRAM would provide in the guidelines for reporting "alternative documentation", in lieu of taxable income on the loan application. It would expressly allow for it, and no one would be asking you to resubmit your application to change/modify this factual reporting.
The very fact that any lender would ASK you to resubmit and modify the 1003 is your PROOF that this is not an actual LOAN PROGRAM...but rather a "play-on-words marketing ploy" seeking to trap you into violating your lawful licensed duties. If THAT is the underlying basis for the closing of ANY loan...then you should run as far and as fast as you can away from it!!! Its really common sense!
So whats the bottom line?
WWCC does not object to "bank statement loan programs" or other "alternative documentation" loan programs! Some of our approved lenders/investors may (now or in the future) offer such programs. However, WWCC prohibits asserting false representations on Federal Loan Applications! If you can submit a loan with accurate income information, supported by an IRS-4506, and close without resubmitting a modified (read: false!) 1003.....then this is no different than ANY loan that we regularly close. It is at the underwriters discretion to approve or deny any loan, and to choose which income documentation to evaluate. But we have an absolute duty as the agent of the borrower to accurately report (all the way through to the closing) the material facts required on a federal loan application. A true LOAN PROGRAM will allow for this! A false marketing ploy will NOT allow for this, and will require YOU to submit a false loan application to facilitate the closing.
And one last thing.... Consider what this means for your future, and perhaps more-so for the future of your borrower/client. Legal demands asserting income misrepresentation and fraud always "float downhill", and will land on you and the borrower.
First, most loans are assigned (change hands) many times on the secondary market over time. By the time a legal matter arrises, its not likely to be coming from the original lender who made the loan with you. Most of these "pass through lenders" (as opposed to brand name servicing lenders, such as Flagstar Federal Savings Bank, for example) will assign the loan to a "take out investor" within weeks of the closing. Almost immediately you and the borrower will be "dealing with" an unknown third party who has no direct knowledge or care about the persons or processes that went into closing the original transaction. Given a year or two, the loan is very likely to "change hands" again, and again. Thus, using the "excuse" that.....some lender who is long since no-longer-involved.... "told you" to change/modify the 1003....will just simply fail! No one will care. What you signed and submitted...is what you (mis)represented on behalf of your principal.
Secondly, any legal demand for damages caused by income misrepresentation will result in multiple claims between the parties involved. Each party will point the finger at the next party for the negligence involved in any false assertion on the loan application. The servicing lender (at the time) will make demand upon the Broker, who will in turn make a demand upon the Agent (the MLO) who signed and verified the 1003, who will in turn make a demand upon the borrower who also signed the application to submit these assertions. And the borrower is likely to counter-sue the MLO for negligent malpractice by not properly informing them of the rules and conditions they were supposed to follow. After all, that is why the borrower PAYS an agent (MLO) his/her commission....to receive proper guidance and advise through this legal transaction. That is why you are LICENSED by the State and the Feds! If you fail to give the borrower such fundamental legal advice as "don't misrepresent your taxable income on a Federal Loan Application"....then you are committing malpractice with negligence! YOU should KNOW that this can be construed as mortgage/bank fraud on behalf of your principal, no matter what some "lender" may be telling you. All in all.....this will not turn out well for anyone, but least of all for the MLO!
Now, all of that sounds dark and dreary, and I am sorry about that! But those are the real world experiences you can expect. Its actually happening within our environment as we speak!
So, will WWCC do a "Bank Statement Loan"? YES, sure!
Who do we have that offers this PROGRAM? Honestly....I don't know of one who does it legitimately!
But I do know that we'll require a 4506 in our file on any "alt doc" loan, and we'll report THAT INCOME (the official taxable income) on any loan application that we submit on behalf of our clients, as we are required to do. The rest of it is at the discretion of the underwriting of the lender. Its up to them to ACTUALLY evaluate and rely upon alternative income documentation...such as bank statements.
WWCC's approved lender list has many many lenders on it, both in our banking channel, and as TPO Broker-lenders. I am not aware (today) of any lender that offers a TRUE "Bank Statement Loan Program". But I'd be happy to be introduced to one! I am told by Flagstar that they are vetting such a program, and may unveil it later this year. Time will tell.
As long as a lender does not require US to misrepresent income on the loan application, then I am happy to close ANY loan.
And there is no reason why a true lender with a true bank statement "alt doc" program should NEED us to misrepresent or modify income on a 1003! Its just factual information, right?! Whats the big deal if we show them the taxable income from official records on the 1003? A legitimate professional lender should EXPECT us to do nothing less! We are additionally showing them the valid and verifiable bank statements....and THEY are free to evaluate ALL of it, and select which income calculation they wish to rely upon when approving the loan. If they wish to use "alternative documentation" such as bank statements, and if that really IS the criteria of the loan program.....then what's the problem?
Even if they wish to show the "averaged bank statement income" on a 1003 for their own documentation purposes...then they, as the lender, can prepare their own 1003 (and ask the borrower to sign it or not). There is zero legitimate reason for a lender to be asking us, the licensed mortgage loan originators acting as the legal agent of the principal's formal representations, to change the income that we are factually representing when submitting our clients application for a loan, under federal law. For what possible purpose, OTHER THAN hiding the truth from the "take out investors" after the fact, would they be needing us to change such material facts?!
We are as eager as anyone to facilitate the closing of "alternative documentation loans", and we certainly see the potential sales opportunities, and the ability to help and service a whole new group of consumers. But.....we cannot do so by violating regulations, or guidelines, or the representations and warranties we have in our lender relationships. Not only do WE not want the liability from it, as a company.....but we want to protect each of our loan officers and our customers from such genuine liability!
You can rest assured that we are consistently looking for new and cutting edge programs that are real, safe, and useful. We do believe that mainstream alt-doc programs are forthcoming. In the meantime....hopefully you now have a better understanding of the questions you should be asking of lenders, lender-reps, and your borrowers....on this topic of "bank statement loans". Be careful please!
Thank you for for taking the time to read and understand these important considerations.