Bloomberg BNA Banking Daily quoted me in Court Asked to Second-Guess Bank Capital, Earnings, Risk Ratings (behind a paywall). It reads, in part,
WalletHub quoted me in What Is A Credit Reference? Definition, Examples & More. It opens,
A “credit reference” is a document that attests to the creditworthiness of a prospective borrower or rental applicant. The most common type of credit reference is a credit report, as it chronicles an individual’s or business’s credit history. And the most notable credit reports are those from TransUnion, Equifax and Experian. You can check your TransUnion credit report for free on WalletHub.
A credit report isn’t the only type of credit reference, though. The term can also refer to the individual accounts on your credit report. For example, someone with no prior credit history may be deemed to have “insufficient credit references.” And that just means there are too few data points for the lender to assess his or her creditworthiness.
A letter from a credible source that speaks to an applicant’s financial trustworthiness would also qualify. This type of credit reference isn’t likely to help individual borrowers very much, except maybe for situations involving small neighborhood banks and credit unions, which are more likely than national lenders to value personal relationships. But it plays a big role in corporate lending. This includes business-to-business credit arrangements, where a borrower’s history is less readily available and the voucher of a trusted source – such as a vendor with whom the business has previously worked – is thus more meaningful. In this context, a credit reference may also be called a “trade reference.”
Below, we’ll explore credit references in greater detail, explaining the most common types of credit references and when they’re most effective.
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Ask The Experts: Assessing The Effectiveness Of Credit References
Credit references are characterized by variety. Myriad types exist and the impact of many is difficult to quantify. We therefore sought additional perspectives from a panel of lending experts from both the consumer and corporate sides of the aisle.
Mortgage lenders want to know that borrowers have the capacity to repay your loan and one way that they can gain comfort is to see what types of assets you have. Lenders will often ask to see your statements from financial institutions as part of their underwriting process. These statements can be considered as a type of credit reference. The more liquid the asset (a savings account, for instance) the better, as far as the lender is concerned. This is because it means that you can access the funds in the account readily if you needed to make a mortgage payment.
Realtor.com quoted me in Mortgage Pre-Qualification vs. Pre-Approval: What’s the Difference? It opens,
When buying a home, cash is king, but most folks don’t have hundreds of thousands of dollars lying in the bank. Of course, that’s why obtaining a mortgage is such a crucial part of the process. And securing mortgage pre-qualification and pre-approval are important steps, assuring lenders that you’ll be able to afford payments.
However, pre-qualification and pre-approval are vastly different. How different? Some mortgage professionals believe one is virtually useless.
“I tell most people they can take that pre-qualification letter and throw it in the trash,” says Patty Arvielo, a mortgage banker and president and founder of New American Funding, in Tustin, CA. “It doesn’t mean much.”
What is mortgage pre-qualification?
Pre-qualification means that a lender has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount.
But here’s the rub: Most often, the pre-qualification letter is an approximation—not a promise—based solely on the information you give the lender and its evaluation of your financial prospects.
“The analysis is based on the information that you have provided,” says David Reiss, a professor at the Brooklyn Law School and a real estate law expert. “It may not take into account your current credit report, and it does not look past the statements you have made about your income, assets, and liabilities.”
A pre-qualification is merely a financial snapshot that gives you an idea of the mortgage you might qualify for.
“It can be helpful if you are completely unaware what your current financial position will support regarding a mortgage amount,” says Kyle Winkfield, managing partner of O’Dell, Winkfield, Roseman, and Shipp, in Washington, DC. “It certainly helps if you are just beginning the process of looking to buy a house.”
The Spring 2017 edition of the Consumer Financial Bureau’s Supervisory Highlights contains “Observations and approach to compliance with the Ability to Repay (ATR) rule requirements. The ability to repay rule is intended to keep lenders from making and borrowers from taking on unsustainable mortgages, mortgages with payments that borrowers cannot reliably make. By way of background,
Prior to the mortgage crisis, some creditors offered consumers mortgages without considering the consumer’s ability to repay the loan, at times engaging in the loose underwriting practice of failing to verify the consumer’s debts or income. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the Truth in Lending Act (TILA) to provide that no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan according to its terms, as well as all applicable taxes, insurance (including mortgage guarantee insurance), and assessments. The Dodd-Frank Act also amended TILA by creating a presumption of compliance with these ability-to-repay (ATR) requirements for creditors originating a specific category of loans called “qualified mortgage” (QM) loans. (3-4, footnotes omitted)
Fundamentally, the Bureau seeks to determine “whether a creditor’s ATR determination is reasonable and in good faith by reviewing relevant lending policies and procedures and a sample of loan files and assessing the facts and circumstances of each extension of credit in the sample.” (4)
The ability to repay analysis does not focus solely on income, it also looks at assets that are available to repay the mortgage:
a creditor may base its determination of ability to repay on current or reasonably expected income from employment or other sources, assets other than the dwelling (and any attached real property) that secures the covered transaction, or both. The income and/or assets relied upon must be verified. In situations where a creditor makes an ATR determination that relies on assets and not income, CFPB examiners would evaluate whether the creditor reasonably and in good faith determined that the consumer’s verified assets suffice to establish the consumer’s ability to repay the loan according to its terms, in light of the creditor’s consideration of other required ATR factors, including: the consumer’s mortgage payment(s) on the covered transaction, monthly payments on any simultaneous loan that the creditor knows or has reason to know will be made, monthly mortgage-related obligations, other monthly debt obligations, alimony and child support, monthly DTI ratio or residual income, and credit history. In considering these factors, a creditor relying on assets and not income could, for example, assume income is zero and properly determine that no income is necessary to make a reasonable determination of the consumer’s ability to repay the loan in light of the consumer’s verified assets. (6-7)
That being said, the Bureau reiterates that “a down payment cannot be treated as an asset for purposes of considering the consumer’s income or assets under the ATR rule.” (7)
The ability to repay rule protects lenders and borrowers from themselves. While some argue that this is paternalistic, we do not need to go much farther back than the early 2000s to find an era where so-called “equity-based” lending pushed many people on fixed incomes into default and foreclosure.
OppLoans.com quoted me in What is the Debt to Income Ratio? It opens,
One of the great things about credit is that it lets you make purchases you wouldn’t otherwise be able to afford at one time. But this arrangement only works if you are able to make your monthly payments. That’s why lenders look at something called your debt to income ratio. It’s a number that indicates what kind of debt load you’ll be able to afford. And if you’re looking to borrow, it’s a number you’ll want to know.
Unless your rich eccentric uncle suddenly dies and leave you a giant pile of money, making any large purchase, like a car or a home, is going to mean taking out a loan. Legitimate loans spread the repayment process over time (or a longer term), which makes owning these incredibly expensive items possible for regular folks.
But not all loans are affordable. If the loan’s monthly payments take up too much of your budget, then you’re likely to default. And as much as you, the borrower, do not want that to happen, it’s also something that lenders want to avoid at all costs.
It doesn’t matter how much you want that cute, three-bedroom Victorian or that sweet, two-door muscle car (or even if you’re just looking for a personal loan to consolidate your higher interest credit card debt). If you can’t afford your monthly payments, reputable lenders aren’t going to want to do business with you. (Predatory payday lenders are a different story, they actually want you to be unable to afford your loan. You can read more about that shadiness in our personal loans guide.)
So how do mortgage, car, and personal lenders determine what a person can afford before they lend them? Well, they usually do it by looking at their debt to income ratio.
What is the debt to income ratio?
Basically, it’s the amount of your monthly budget that goes towards paying debts—including rent or mortgage payments.
“Your debt to income ratio is benchmark metric used to measure an individual’s ability to repay debt and manage their monthly payments,” says Brian Woltman, branch manager at Embrace Home Loans (@EmbraceHomeLoan).
“Your ‘DTI’ as it’s commonly referred to is exactly what it sounds like. It’s calculated by dividing your total current recurring monthly debt by your gross monthly income—the amount you make before any taxes are taken out,” says Woltman. “It’s important because it helps a lender to determine the proper amount of money that someone can borrow, and reasonably expect to be paid back, based on the terms agreed upon.”
According to Gerri Detweiler (@gerridetweiler), head of market education for Nav (@navSMB), “Your debt to income ratio provides important information about whether you can afford the payment on your new loan.”
“On some consumer loans, like mortgages or auto loans, your debt to income ratio can make or break your loan application,” says Detweiler. “This ratio typically compares your monthly recurring debt payments, such as credit card minimum payments, student loan payments, mortgage or auto loans to your monthly gross (before tax) income.”
Here’s an example…
Larry has a monthly income of $5,000 and a list of the following monthly debt obligations:
Credit Card: $150
Student Loan: $400
Installment Loan: $250
To calculate Larry’s DTI we need to divide his total monthly debt payments by his monthly income:
$2,000 / $5,000 = .40
Larry’s debt to income ratio is 40 percent.
David Reiss (@REFinBlog), is a professor of real estate finance at Brooklyn Law School. He says that the debt to income ratio is an important metric for lenders because “It is one of the three “C’s” of loan underwriting:
Character: Does a person have a history of repaying debts?
Capacity: Does a person have the income to repay debts?
Capital: Does the person have assets that can be used to retire debt if income should prove insufficient?
What is a good debt to income ratio?
“If you listen to Ben Franklin, who subscribed to the saying ‘neither a borrower nor lender be,’ the ideal ratio is 0,” says Reiss. But he adds that only lending to people with no debt whatsoever would put home ownership out of reach for, well, almost everyone. Besides, a person can have some debt on-hand and still be a responsible borrower.
“More realistically, in today’s world,” says Reiss, “we might take guidance from the Consumer Financial Protection Bureau (CFPB) which advises against having a DTI ratio of greater than 43 percent. If it creeps higher than that, you might have trouble paying for other important things like rent, food and clothing.”
“Requirements vary but usually if you can stay below a 33 percent debt-to-income ratio, you’re fine,” says Detweiler. “Some lenders will lend up to a 50 percent debt ratio, but the interest rate may be higher since that represents a higher risk.”
For Larry, the guy in our previous example, a 33 percent DTI would mean keeping his monthly debt obligations to $1650.
Let’s go back to that 43 percent number that Reiss mentioned because it isn’t just an arbitrary number. 43 percent DTI is the highest ratio that borrower can have and still receive a “Qualified Mortgage.”
US News & World Report quoted me in Here’s What We Know About Donald Trump’s Trust Fund. It opens,
With all the talk about how Donald Trump will be handling his vast business empire as he assumes the presidency, some questions were finally answered this week, and this much is clear: Donald Trump is putting his business assets in a trust.
“Through the trust agreement, he has relinquished leadership and management of the Trump Organization to his sons Don and Eric, and a longtime Trump executive, Alan Weiselberg,” says Sheri Dillon, a lawyer for the president-elect.
But what does that mean?
What is a trust to begin with? A trust is a legal structure with three main parties: The trustor, trustee and beneficiary. The trustor gives another party, the trustee, the right to manage the specified assets for the benefit of its designated beneficiaries.
“According to Trump, his sons, Donald Jr. and Eric, as well as a business associate, would be the trustees. After transferring the assets to the trust, Trump could then be a beneficiary of the trust,” says David Reiss, professor of law at Brooklyn Law School. “The trustees administer the affairs of the trust on behalf of the beneficiaries. The beneficiary receives the income from the trust or the property within the trust.”
Trump has previously said his children will be the primary financial beneficiaries of the trust, but Trump made it clear that he planned on returning to the Trump Organization when his presidency is over. At that point, it’s possible Trump could have a fat check waiting for him, depending on the trust’s structure.
“The trust’s income or property could be doled out on an ongoing basis or deferred to some future point in time, depending on the terms of the trust,” Reiss says.
Politico quoted me in Selling His Empire Would Cost Trump Money. A Lot of It. It opens,
Donald Trump’s critics say the only way for him to keep his business interests separate from the public’s interest is to simply get out of business entirely, selling his companies and putting the proceeds into anonymous assets that someone else can manage.
But there’s nothing simple about it: unloading a real estate empire as large as Trump’s is a lengthy, complicated process fraught with ethical pitfalls, one that could end up costing a fortune.
“He has to make a choice,” said David Reiss, director of Brooklyn Law’s Center for Urban Business Entrepreneurship. “How much pain is he willing to take?”
Trump, who’s expected to lay out a plan to address conflicts of interest at a press conference Wednesday, heads a particularly difficult estate to unwind. Forbes has pegged his net worth at $3.7 billion in September, attributing most of that to real property holdings tangled in debt, partnership agreements, management contracts, branding deals and tax deferrals.
Ethics watchdogs say Trump’s cleanest break would be to sell his company to the public, but an initial public offering — especially one that folds in most or all of Trump’s scattered businesses — would be complicated, costly and time-consuming.
“The nature of the business doesn’t lend itself to going public,” said Jan Baran, co-chair of Wiley Rein’s election law and government ethics practice. “Rolling in all the real estate and the royalty contracts and all the other orphans like wineries and steaks, it’s a little hard to imagine any public companies that resemble what his business is, because it’s such a hodgepodge of things. It would take a while, it would take at least a year.”
What’s more, Baran noted, an IPO would require underwriters to raise capital and pull together an offering — raising new concerns about investment firms potentially currying favor with the new administration.
“Are the ethics complainers willing to let Goldman Sachs do the underwriting on this public offering?” he said. “Somebody’s got to put it together.”
Even if Trump chose to skip the IPO and just liquidate his assets via direct sales, he’d face a complex task — and a costly one.
“This would be an extraordinarily difficult situation,” said Neil Shapiro, a law partner at Herrick Feinstein in New York. “It would certainly be unprecedented in terms of somebody liquidating a portfolio of this size. We’re in uncharted territories here.”
The problems start with finding a buyer. The pool of people shopping for, say, a Fifth Avenue skyscraper is small, and only the buyer and seller can say for sure whether the price paid is fair. As such, selling a property raises nearly as many ethical quandaries for Trump as owning it. A buyer looking to curry favor with the next president might pay too much. Another might do Trump a favor by making a quick deal while paying too little.