Citadel jolts industry as it cuts bank statement requirement again

16 August 2017

Citadel Servicing Corp. last week dropped its requirement for income documentation to a single month’s bank statement in a move that resets the limits of how far mortgage lenders will go to wave in borrowers, according to an executive at the company and four other lenders.

The new bank statement program came as a surprise to some market participants, including three other lenders who pondered whether the lack of a longer income history could run Citadel afoul of regulations including the CFPB’s Ability-to-Repay rule. Citadel had already reduced its minimum for bank statements once, to 12 months from 24 months, about a year and a half ago.

Citadel’s program, the first of its kind outside of a niche community bank offering, is justified by compensating factors including lower LTVs and higher credit scores than required for its other loans, CEO Daniel Perl said. Citadel will also measure a borrower’s income against his type of business and credit usage to identify the kind of inconsistencies that were often overlooked in the pre-crisis real estate boom, he said.

The move should draw borrowers looking for ease of application, he said. The potential market is “huge,” he said, adding that existing personal and business bank statement programs produce half of Citadel originations.

“All these (bank statement) products have allowed the expansion of the residential credit box in a reasonable and prudent manner,” Perl said. Borrowers in the one-month bank statement program must have “excellent credit,” he said.

Specifically, requirements include a 700 minimum credit score, a 70% maximum LTV for purchase loans and a 65% maximum LTV for refinances, according to Citadel’s 10 August announcement. Borrowers must have 24 months of mortgage history, so first-time homebuyers wouldn’t qualify, Perl said.

“Your past credit is an excellent indicator of your future ability to repay … and that is fundamentally the key issue,” he said.

But at least three other lenders and one former capital markets executive were circumspect about the new program given subjective flexibility built into the ATR rule. Even as the rule has no minimum documentation requirements, it requires that lenders make a reasonable and good faith determination of the borrower’s ability to make payments, based on the facts and circumstances of the borrower and loan, as reported.

“If a court or a regulator were to conclude that there was not sufficient verification of a consumer’s income or assets, the lender would have a problem,” said Jed Mayk, a partner with Hudson Cook, who specializes in regulatory compliance for mortgage lenders.

The three lenders said they weren’t tempted to follow Citadel.

“We feel like one month of bank statements tells you nothing,” said one. “It looks more like a stated income loan and leaves me scratching my head,” said another. The third said he’s not comfortable there’s sufficient basis to meet the ATR rule, though he qualified his comment with “as of today.”

Angel Oak, another non-QM lender, was more open to the value of offering a less onerous path to credit for more of the 15m self-employed borrowers across the country.

The performance of Angel Oak’s 12- and 24-month bank statement loans has been better than expected, with zero defaults, said Tom Hutchens, a senior vice president at the company. Bank statement programs can actually give lenders a better idea of what a borrower actually makes since tax returns are often affected by deductions and write-offs, he said.

While the bank statement product is “hugely important” for the housing market, the specter of regulation still looms large, he said.

“We just want to be sure we are making good loans and we meet the Ability to Repay guidelines,” he said.

Eric Kaplan, a former Ranieri Strategies executive who has long advocated for a renaissance in how private mortgages are underwritten and financed, said bank statement mortgages done properly can make sense, and meet regulatory requirements. The uncertainty over how they will be treated by regulators is an unknown, however, saddling lenders with an unnecessary risk, he said.

He has urged regulators to review new mortgage products, such as bank statement products, and provide some clarity on their views.

In the meantime, Kaplan was hopeful that competitive pressures wouldn’t unleash a race to the bottom by lenders ill-equipped to handle the more specialized mortgages.

“The danger is that others will offer that product but not have the underwriting experience to underwrite the loans properly,” he said.