Small Bank's 'Lite Doc' Loans More Stringent than Low Doc of Yore
A community bank's new loan has left some borrowing Shakespeare's line: What's in a name?
Quontic Bank in New York has begun originating "Lite Doc" loans that feature streamlined income documentation requirements. But the new product also has stringent down-payment and credit score requirements, unlike the similarly sounding no-doc, low-doc and stated-income mortgages from the early 2000s.
Quontic, a Community Development Financial Institution, named the mortgage product "Lite Doc" to contrast it with the once-popular infamous loans that required little or no income documentation.
"Lite Doc is meant to imply that one's income must, in fact, be documented but that the requirements are light or streamlined," said Steven Schnall, Quontic Bank chairman and chief executive.
With Lite Doc, Quontic intends to reach out borrowers — especially immigrants and members of the large Asian-American community in Queens — who might not have traditional lines of income. So far the bank has originated fewer than 10 of these loans, with about a dozen more in the pipeline. The average size of the loans has been $483,000, a bank spokesman said.
"Our intention in creating this product was to provide mortgage financing to highly creditworthy borrowers with substantial savings or access to family funds who might not be able to provide conventionally acceptable income documentation," Schnall said.
The product's guidelines are fairly stringent. Prospective borrowers are expected to make at least a 40% down payment on the house and must be the property's primary residents. Additionally, they must hold a FICO credit score at or above 700.
Quontic further requires that the borrowers maintain post-closing liquidity to cover 12 months' worth of mortgage payments and make a deposit with the bank equivalent to six months of payments. As for income verification, borrowers must provide either written verification of employment and income, or a letter from a certified public accountant with a 12-month income and expense statement.
"It's actually a fully documented loan, just in a different fashion," said Schnall, founder and former CEO of New York Mortgage Co., which spun off New York Mortgage Trust.
The bank's status as a Community Development Financial Institution allowed it to receive exemptions from the ability to repay and Qualified Mortgage rules that have made these loans a rarity in the current lending landscape. CDFIs are certified by the CDFI Fund, a division of the U.S. Treasury Department established to support programs and institutions that provide credit and financial services to underserved markets.
The exemptions were put in place mainly to allow CDFIs to continue existing loan programs directed at underserved communities that might not meet the new, more stringent standards, said Jeannine Jacokes, chief executive of the Community Development Bankers Association.
"When the rule came out, many were concerned that the rules would not allow them to do the lending they had previously done," Jacokes said, and ultimately the Consumer Financial Protection Bureau "didn't want to disrupt our models that have worked well."
Jacokes added that she was not aware of any other bank that began offering a loan product like Lite Doc after the ability-to-repay and QM rules went into effect.
Quontic had become a CDFI before it became aware of the exemptions because it already lent to borrowers in low-income census tracts. Still, Schnall views the product as keeping in the spirit of the CDFI initiative.
"Where the regulations might have gone too far is that it took all of the discretion out of the lender's hands and prevents them from making very good loans to very worthy borrowers," he said.
In Jacokes' view, the fact that CDFIs tend to originate loans on a one-on-one basis rather than through an automated process removes some of the risk involved.
But the shaky history of loans resembling the Lite Doc product may be keeping other CDFIs from marketing similar products. No-doc and low-doc loans have gone through boom and bust cycles since they were introduced in the mid-1980s, said Ed Pinto, co-director of the American Enterprise Institute's International Center on Housing Risk.
For many of these types of loans, lenders started with products that had more stringent requirements and were kept on portfolio like Quontic's. Eventually though, lenders loosened restrictions as the loans became more popular, leading to defaults and foreclosures, Pinto said.
Another issue lenders can face, even if they do resist the pressure to broaden the loan's requirements, is the risk that homeowners will take out a second mortgage or home equity line of credit that can reduce their initially large down payment.
"We've seen this movie before and we know how it ends," Pinto said. "An individual lender, a small lender, has a better chance of keeping this on the straight and narrow. But a small lender can't control the second mortgage situation."
Schnall said he is well aware of the troubled past for loan types resembling Lite Doc.
"When the whole secondary market started to proliferate and the market had an appetite for the products, all of a sudden lenders started making these loans all the way up to 100% loan-to-value (ratios)," he said. If borrowers maintained their down-payment positions, they would have incentives to sell their homes before letting them fall into foreclosure.
For now though, Schnall said that Quontic plans to keep the Lite Doc program small to make regulators comfortable with the risk.
"We need to show that these loans can perform," he said. "We're not opening the floodgates."