Many non-QM loans are built for borrowers whose income doesn't show up neatly on a W-2: the self-employed, business owners, gig workers and people living on assets. These are often called alternative-documentation or bank-statement loans. The key point for an MLO: they still have to satisfy the ability-to-repay (ATR) rule in 12 CFR 1026.43, and verification is not optional.
The rule: verify with reasonably reliable third-party records
A creditor must verify the income or assets it relies on using third-party records that provide reasonably reliable evidence of them. Regulation Z says a creditor may use an IRS tax-return transcript, and gives other examples of acceptable records:
- copies of tax returns filed with the IRS or a state taxing authority
- W-2s or similar IRS forms reporting wages or withholding
- payroll statements, including military Leave and Earnings Statements
- financial institution records
- records from the employer, or from a third party that obtained information from the employer
- government agency records of income from benefits or entitlements
- receipts from check cashing services
- receipts from funds transfer services
"Financial institution records" is what makes bank-statement lending possible within the rule. The list is examples, not a closed set, but every record must be third-party and reasonably reliable.
Related: What to Expect on the NMLS SAFE MLO Exam
Income or assets
The ATR rule lets a creditor consider a consumer's current or reasonably expected income or assets, other than the value of the home securing the loan. That's why some programs qualify borrowers on documented assets, such as investment accounts, rather than on income. The home's own value can't be the basis for deciding the borrower can repay.
Employment and debts
- If the creditor relies on employment income, it must consider current employment status, and may verify employment orally as long as it keeps a record of the information obtained.
- Debts are generally verified through a credit report. If the application lists a debt the credit report doesn't show, the creditor doesn't have to verify that debt independently.
Why "stated income" doesn't work
A loan where the borrower simply states an income figure and nobody checks it can't meet the ATR requirement to verify the income the creditor relies on. Alternative documentation is a different way of proving income, not a way of skipping proof.
The MLO's role
- Collect complete records, and don't "help" a borrower fit a program by shading numbers. Income misrepresentation is a recognized form of mortgage fraud.
- Be transparent about why a borrower is in a non-QM program and what it costs compared with other options.
- Make sure what's in the file supports the numbers on the application.
On the SAFE MLO Test
Expect questions on what the ATR rule requires creditors to consider and verify, which records count as third-party verification, and the difference between alternative documentation and no documentation. Try our SAFE MLO Test practice questions.