Bipartisan Bill Would Expand Mortgage Access for Self-Employed Workers

Senators yesterday introduced legislation, supported by the Mortgage Bankers Association, that would expand access to mortgages for the self-employed, gig workers and other creditworthy individuals with non-traditional forms of income while protecting consumers.

Sens. Mark Warner, D-Va., and Mike Rounds, R-S.D., introduced the Self-Employed Mortgage Access Act (https://www.scribd.com/document/387263676/Self-Employed-Mortgage-Access-Act). The bill would help creditworthy borrowers with non-traditional forms of income by allowing lenders to verify an applicant’s income using additional forms of documentation other than the W-2.

“An increasing number of Americans make their living through alternative work arrangements, like gig work or self-employment,” Warner said. “Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income–paystubs or a W-2–as someone who works 9-to-5. This bill will allow these workers to supply other forms of paperwork to verify their income while continuing to protect consumers from predatory lending.”

MBA Senior Vice President of Legislative and Political Affairs Bill Killmer said MBA strongly supports the bill.

“This bipartisan, common sense legislation would allow the use of prudent and well-established underwriting standards to responsibly expand access to mortgage credit by providing lenders and investors greater certainty about standards for validating borrower ability to repay,” Killmer said. “We believe consumers who own small businesses or are otherwise self-employed should not face unnecessary obstacles to homeownership. By allowing the use of standards already in place at FHA, VA, USDA, Fannie Mae and Freddie Mac, this legislation better ensures that all consumers are treated on a level playing field when it comes to mortgage underwriting.”

The bill addresses an unintended consequence of the Dodd-Frank Act, which required creditors to determine whether a borrower could afford to repay a mortgage loan as part of the lending process. In January 2013, the Consumer Financial Protection Bureau adopted the Ability-to-Repay Rule, which requires lenders to look at a customer’s income, assets, savings, and debt in relation to monthly loan payments in order to satisfy the requirements for a Qualified Mortgage.

Since the QM standard was finalized, lenders and investors in the mortgage market have shown a clear preference for QM loans due to the potential for liability associated with making non-QM loans. Unless a loan is eligible for sale to the government-sponsored enterprises or insurance by government agencies, QM loans require lenders to satisfy the rigid requirements of the CFPB’s Appendix Q guidelines. These guidelines often results in a less precise calculation of income for borrowers with non-W-2 income sources, such as rental income, retirement income or income from self-employment.

The effect, proponents of the bill said, is creditworthy individuals relying on non-traditional income, who represent up to 42 million Americans, or 30 percent of the labor force, are unduly constrained in their ability to obtain a mortgage. The legislation would expand the types of documentation that self-employed individuals could submit to demonstrate they are a credit worthy borrower and banks could use to keep a loan in qualifying mortgage status. Those types of documentation include the IRS Form 1040 Schedule C for sole proprietorships, the IRS Form 1040 Schedule F for farming, the IRS Form 1065 Schedule K-1 for partnerships and the IRS Form 1120-S for S Corporations.

“We shouldn’t unfairly punish entrepreneurs, farmers and other small business owners because they don’t earn income on a W-2,” Rounds said. “Our legislation gives financial institutions flexibility in the forms of documentation that can be used when applying for mortgage credit, making it easier for South Dakota families to realize their dreams of homeownership.”

In addition to MBA, the bill has support from other industry trade groups. “The ability to repay and associated Qualified Mortgage rules are among the most important consumer protections to emerge from the financial crisis and the Dodd-Frank Act,” said Barry Zigas, Director of Housing with the Consumer Federation of America. “This bill would provide common sense direction to the CFPB in its application of the statutory requirements and give lenders and consumers alike an easier, less burdensome way to meet these tests without weakening their important protections for consumers.”

“The consumer protections embedded in the ability to repay and Qualified Mortgage rules must be preserved as a centerpiece of post-financial crisis mortgage reforms,” said Michael Stegman, Senior Fellow with the Housing Finance Program in Center for Financial Markets at The Milken Institute. “But experience has demonstrated that inadequate lender guidance on how to underwrite applicants that do not fit a standardized model has left many consumers underserved. By expanding responsible lender guidance beyond that available in Appendix Q, this bill should broaden access to credit for self-employed, seasonal workers and low- and moderate-income borrowers.”