Under Comment 43(c)(7)-3, an example is given that "the creditor may reasonably and in good faith determine that a consumer has the ability to repay despite a higher debt-to-income ratio or lower residual income in light of the consumer's assets [/u]other than the dwelling,[u]including any real property attached to the dwelling, securing the covered transaction, such as a savings account."

Does this mean a low LTV on the collateral/dwelling cannot be considered a compensating factor for a high DTI?

That would be the way that I read it. A similar comment appears in 43(c)(2)(I): "The creditor may consider any of the consumer's assets, other than the value of the dwelling that secures the covered transaction . . ."

I read it the same way.

I agree. A low LTV doesn't improve cash flow.

Our Credit Administrator will make policy exceptions when it comes to acceptable collateral, based on compensating factors (i.e. high income, low DTI). ATR does not address collateral requirements, so therefore this is OK, right??

As long as they exhibit ability to repay and otherwise meet your policy and any requirements of any QM you might be qualifying them under.

Getting a ton of push back on the low LTV/high DTI issue for non-QMs. Can the bank establish limits in order to use this as a compensating factor?

For example, an LTV of 30% or less can be used as a compensating factor if the DTI is between 45% and 50%.

Would this be an ATR violation??

I think it would be a violation. As Kathleen said, low LTV doesn't mean you can repay the loan.

1026.43 says you must consider:

(i) The consumer's current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan;

Additionally the commentary states that your ATR determination would not be reasonable if:

The creditor disregarded evidence that the consumer would have the ability to repay only if the consumer subsequently refinanced the loan or sold the property securing the loan.

Thanks so much for the citings, dblack.

Agree with Kathleen and others. The days of the Low LTV "asset based" loan are gone, if other factors are not present to demonstrate the ability to repay. Collateral is not a recognized source of ability to repay.

Loan Originators and Sales will have a hard time adjusting to this but that is the new reality.

So just to be clear, a 50% DTI with strong residual income and/or assets (other than the collateral) would not be a violation, correct? And there is no percentage limit right, a 90% DTI with strong residual income and/or assets also could be acceptable? (I'm not saying it's likely, just saying if we document sufficient residual income or assets, this would not be a violation?)

JMHO, I would think it would be an issue that bank addressed in its P&P. We have a lending committee that addresses loans with strong residual income and DTIs in excess of 50%.