Most loan applications today require two years of 1040 income tax statements, two years of employment W2s and at least four pay stubs, in addition to bank statements and credit checks.
The Quontic loan does not have to comply with strict new "ability-to-repay," or ATR, rules established in the wake of the financial crisis under Dodd-Frank legislation, due to a little loophole: Quontic is designated as a community development financial institution, or CDFI, under a small U.S. Treasury program which funds economic revitalization in low-income communities.
The fund, established in 1994, "serves mission-driven financial institutions that take a market-based approach to supporting economically disadvantaged communities," according to the Treasury website. Quontic, based in Queens, New York, meets the requirements because it makes loans to borrowers in a low-income community. CDFI lenders are exempt from having to comply with so-called ability-to-repay rules.
"We no longer have to have our borrowers qualify in the traditional sense," said Quontic CEO Steve Schnall. "Because of this new Dodd-Frank requirement, a lot of people who don't meet the very strict and traditional qualifying guidelines that the ATR requires are simply ineligible for financing. There's a huge swath of the population that simply can't get a loan on a primary residence anymore."
The "Lite Doc" loan is not the "low-doc" loan of the past. It is only for owner-occupied properties, so no investors, and it requires a 40 percent down payment on the property, far higher than most conventional or government loan products. There is a minimum FICO credit score of 700, and the borrower must show he or she has a minimum of 12 months worth of principal, interest, taxes and insurance in the bank at closing.
Schnall said a lot of the bank's customers are immigrants where seven or eight family members may be pooling the money to make the down payment. They don't have the traditional income documentation that other borrowers might have, as they get some payment in tips and bonuses.
"A lot of these lower-income earners, they jump around from job to job to job and that doesn't mean that they're not going to earn consistently, but they might not earn consistently at one particular place of employment," said Schnall. "Most of these borrowers have immaculate credit, they have substantial equity in the property and significant liquidity as the result of gifts from family members."
Schnall admits, however, that Quontic can make these loans to anyone anywhere in the country. The Quontic program is barely a few months old and has closed just seven loans in New York and Miami, but there are more in the pipeline.
"The CDFIs get this privileged status because their sole purpose is to help consumers," said Laurence Platt, a partner at the law firm Mayer Brown who specializes in consumer financial services issues. "They don't have a traditional profit motive. The concern about steering borrowers into inappropriate loans isn't there."
While not the functional equivalent, Platt said the CDFI is like a nonprofit lender where the underlying premise is you don't have to worry about them exploiting customers. He does, however, raise concerns.
"It doesn't mean that it's a prudent loan, it's just not an illegal loan. If you aren't verifying income one way or another, there still is the possibility the borrowers will lie," said Platt.
This is especially true in appreciating housing markets, like New York City. Queens may not be Manhattan, but as both Manhattan and Brooklyn get ever more expensive, Queens is gaining popularity.
"There are certain banks that can carve out niches where such lending can be successful, but you really have to be careful and know what you're doing and stick to your underwriting guidelines rigidly," said Camden Fine, president and CEO of Independent Community Bankers of America, an industry association. "You do have to be careful about your documentation because the regulators are going to come in and examine these loans, and they are going to draw their own opinions, and so you'd better know what you are doing, you better have a lot of expertise in this area before you go down that road."