In keeping with the theme of this week's holiday I thought I would talk a little bit about the Patriot Act. As we all know the Patriot Act was passed after September 11, 2001 to assist in identifying terrorist activity prior to that activity blossoming into another attack on the United States.
There are a couple of critical areas in which directives of the Patriot Act impact lending and ultimately you as a borrower.
The first factor is that lenders are now required to ensure to the best of their ability that you are who you say you are. This is the reason that on the list of items that need to be gathered for a loan application are a driver's license (or other government identification) and a social security card. (Another type of identification other than the social security card may be acceptable but the social security number will be confirmed through the process anyway, so that is often the second form that is most frequently requested. An individual who does not have a social security number will most likely not be approved for a mortgage loan if the loan involves a Government Sponsored Enterprise such as Fannie Mae or Freddy Mac. This is also true of VA, FHA or USDA, since the government's sticky fingers are all over those three mortgage possibilities. For the most part a GSE or one of the government loan programs is involved in 99.9% of all mortgage loans transacted in the United States these days-so it is very normal for a social security card to be requested along with a picture identification.
Once your loan originator has obtained these documents, it is the originator's job to verify that the information on them is correct and to document any discrepancies. The most common of these types of discrepancies is that the address on the identification doesn't match up with the borrower's stated address. Typically a letter explaining why this has occurred solves that problem-though I once had a lender require the borrower to change the address on the driver's license to match where they were currently living-a change that would then have to be made once again when the loan was closed and the borrower was living in his new home. This information is compared to the credit report which also contains address and social security information such as when the number was issued-including whether or not the owner of the number is deceased.
When a borrower signs the Patriot Act form in our loan application packet they are agreeing to allow us to verify identity and request confirmation of identity.
The next Patriot Act chore is an examination of bank statements provided by the borrower. What we are looking for is large cash deposits. The 2001 perpetrators funded themselves with large cash deposits that were run through their bank accounts-hence the government regulation that lenders and financial institutions have to identify and explain large cash deposits. So what constitutes a large cash deposit? The federal rule didn't say, so this particular directive has resulted in some crazy requirements-one bank that I know of required all its borrowers to explain every cash deposit of $99 or more. (Terrorism, $99 at a time-could happen I suppose, packing your gym shorts with dynamite probably doesn't cost that much.) In any event, most lenders went to a standard of looking at cash deposits of 25% of monthly gross income. So if a borrower made $3000 per month, any deposit of $750 or more would be questioned if it was cash or had no identification of where it came from on the bank statement. If for instance, a borrower didn't have direct deposit and deposited his or her pay into their bank account there would be no record of where them money came from on the bank statement. That borrower would then have to produce all the pay stubs for the two month period to show that the deposits were legitimate and if heaven forbid, they took cash out of their check, and the net deposit didn't match the check stub, then they would have to obtain the deposit ticket to show the total amount matched the check. If your tax return came in check form in the mail and you deposited it you might even have to go to the trouble of producing tax returns to show the amount of your refund to prove they matched. And let's not even go into garage sale proceeds or the payback from your brother to whom you loaned money six months ago.
Of all the complaints I have had about new rules for loans this is the one I hear the most often. People tend to get a bit fussy about their money. It's theirs and they don't like having to prove that it is. There is a bit of good news on this front-Fannie Mae and Freddie Mac have rolled back the standard on proving funds and been a bit more specific on what you have to prove. The amount that now stands to be questioned is 50% of your gross monthly income deposited in cash or not showing an identification from where it came. Lenders are now dropping their specific requirements as to requiring proof on lower amounts. That is good news. Obviously we all want to follow the law-but we don't have to get ridiculous about it.
The point is not to have The Patriot Act blow up in our faces.
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