*Note: Standard Underwriting Guidelines are updated annually.

1. THE GENERAL QUALIFIED MORTGAGE RULE/ABILITY TO REPAY
2. PROVIDENT BANK ABILITY TO REPAY(ATR)/QUALITY MORTGAGE (QM) POLICY STATEMENT
3. UNDERWRITING CRITERIA APPROACH
4. GENERAL COMPARISON OF ABILITY-TO-REPAY REQUIREMENTS WITH QUALIFIED MORTGAGES
5. FAIR LENDING
6. NOTIFICATION OF ACTION TAKEN
7. SECOND LOOK- PROCESS FOR THE DENIAL OF A LOAN APPLICATION
8. LTOB (LOANS TO ONE BORROWER) CREDIT LIMIT EXPOSURE
9. UNDERWRITING EXCEPTION PROCEDURES
10. EXCEPTION APPROVAL AUTHORITY:
11. CONTINGENT LIABILITY
12. BORROWER ELIGIBILITY
13. CO-BORROWERS
14. FIRST-TIME HOMEBUYERS
15. OWNERSHIP INTEREST
16. OCCUPANCY
17. TRANSACTION TYPES
18. PURCHASE OF A SHORT SALE PROPERTY
19. ASSETS
20. SALES CONCESSIONS/INTERESTED PARTY CONTRIBUTIONS/FINANCE CONCESSIONS
21. CREDIT REPORT
22. CREDIT ANALYSIS
23. PAYOFF DEBT FOR QUALIFICATION
24. EMPLOYMENT AND INCOME
25. GENERAL INFORMATION ON SELF-EMPLOYED BORROWERS AND INCOME ANALYSIS
26. EVALUATING TAX RETURNS
27. INCOME ANALYSIS: IRS FORM 1040 SCHEDULE C
28. INCOME ANALYSIS: CORPORATE TAX RETURNS (IRS FORM 1120)
29. INCOME ANALYSIS: S CORPORATION AND LLC TAX RETURNS (IRS FORM 1120S)
30. INCOME ANALYSIS: PARTNERSHIP AND LLC TAX RETURNS (IRS FORM 1065)
31. NON-EMPLOYMENT RELATED BORROWER INCOME
32. INSURANCE/TAXES AND MORTGAGE INSURANCE
33. HAZARD INSURANCE REQUIREMENTS
34. PROPERTIES WITH SOLAR PANELS
35. PRIVATE MORTGAGE INSURANCE
36. PRELIMINARY TITLE REPORT REVIEW
37. CLOSING PROTECTION LETTER (CPL)
38. PRIVATE TRANSFER FEES
39. PROPERTY OVERVIEW
40. PRE-FUNDING AUDIT PROCEDURES
41. RISK ADVISORY

The new General QM Final Rule replaces the existing 43% debt-to-income ratio limit in the General QM definition with a price-based limit and removes Appendix Q as well as any requirements to use Appendix Q for General QM loans. The General QM Final Rule also retains the existing product-feature and underwriting requirements and limits on points and fees.

Effective October 1, 2022, Provident Bank Portfolio Products are required to comply with the new General QM Final Rule established by the Consumer Financial Protection Bureau (CFPB). The General QM Final Rule retains the ATR/QM Rule to consider and verify requirements. Provident Bank must make a reasonable, good faith determination, at or before closing a mortgage transaction secured by a dwelling, that a consumer will have a reasonable ability to repay the loan according to its terms.

The SFR Division of Provident Bank must verify compliance with the CFPB’s final rules regarding Ability to Repay (ATR) and Qualified Mortgage (QM). The ATR/QM rule requires the SFR Division to make a reasonable, good-faith determination before a mortgage is consummated, that the consumer has a reasonable ability to repay the loan.

This Guide describes Provident Bank program eligibility and underwriting requirements. In addition to the program eligibility and prudent underwriting, Provident Bank requires all loans meet the Ability to Repay (ATR) rules established by the Consumer Financial Protection Bureau (CFPB).

The ATR rule requires that the originator make a reasonable, good-faith determination before or when the loan is consummated and that the consumer has a reasonable ability to repay the loan. The Underwriter must consider the eight underwriting factors established by the CFPB and the loan file must be documented accordingly.

1. The borrower’s current or reasonably expected income or assets;
2. The borrower’s current employment status;
3. The borrower’s monthly payment on the covered transaction;
4. The borrower’s monthly payment on any simultaneous loan;
5. The borrower’s monthly payment for mortgage-related obligations;
6. The borrower’s current debt obligations, alimony and child support;
7. The borrower’s monthly debt-to-income ratio or residual income; and
8. The borrower’s credit history.

Item	ATR Standard	General QM Definition
Loan feature Limitations	No limitations	No negative amortization, interest-only or balloon payments
Loan term limit	No limitations	30 years
Points & fees limit	No limitations	3%
Payment Underwriting	Greater of fully indexed or introductory rate	Max rate in first 5 years
Mortgage-related obligations	Consider and verify	Included in underwriting monthly payment and DTI
Income or assets	Consider and verify	Consider and verify
Employment Status	Consider and verify	Included in underwriting DTI
Simultaneous loans	Consider and verify	Included in underwriting DTI
Debt, alimony, child support	Consider and verify	Consider and verify
DTI or Residual Income	Consider and verify	Consider and verify
Credit History	Consider and verify	Included in underwriting DTI

This chart compares the general ATR requirements with the requirements for originating QM loans. Additional requirements may apply. For example, the APR thresholds for safe harbor category of QM’s or the portfolio retention requirements for small creditor QM’s or seasoned QM’s.

Provident Bank (PB) is an equal opportunity lender, and we consider all loan applications individually, regardless of the applicant’s race, color, religion, sex, gender, gender identity, gender expression, sexual orientation, marital status, national origin, ancestry, familial status, source of income, disability, veteran or military status, or genetic information. We do not deny a loan because all or part of the applicant’s income comes from public assistance, or because the applicant has exercised any right under the Consumer Credit Protection Act.

When evaluating home loan applications, we do not consider the age or location of property, or the characteristics of the surrounding neighborhood in approving or denying a loan, except in the unusual case where it might be necessary to avoid unsafe business or unsound practice.

In addition, Provident Bank has established a second look policy to ensure that a decision to deny a loan application is reached fairly and does not constitute a violation of anti-discrimination (nondiscriminatory underwriting practices and guidelines) laws/regulations instituted to promote fair-lending.

When Provident Bank receives an application, Provident Bank is required to notify the applicant of action taken within the following timeframes:

• 30 days after receiving a completed application concerning Provident Bank’s approval of, counter offer to or adverse action on the application;
• 30 days after taking adverse action on an incomplete application, unless a notice of incompleteness is provided in accordance with “Incomplete Application” requirements.
• 30 days after taking adverse action on an existing account; or
• 90 days after notifying the applicant of counter offer, if the applicant does not expressly accept or use the credit offered.

An adverse action notice must contain a statement of the action taken, the name and address of Provident Bank, the ECOA Notice, the name and address of the federal agency that administers compliance, and a statement of the specific reasons for the action taken.

A notification of adverse action must be in writing; however, a notice of approval may be expressly stated or implied.

Provident Bank may provide disclosures in electronic form in compliance with the Electronic Signatures in Global and National Commerce Act (e-sign Act) (15 U.S. 7001 et seq.), when the application is accessed electronically by the consumer.

Provident Bank has established the following second look policy and procedure to ensure that a decision to decline a loan application is reached fairly and does not constitute a violation of anti-discrimination laws/regulations instituted to promote fair-lending.

The initiation of this process begins when an underwriter determines that a loan application, if approved, would constitute an unacceptable risk and a counter offer is not a reasonable option.

The following procedures are required:

• Prior to issuing a statement of denial and executing an adverse action in the LOS System, the primary underwriter must obtain a second signature from a senior underwriter or higher underwriting authority.
• The second signature signer is responsible for the following:
• Reviewing the primary underwriter’s transmittal summary (1008), loan application and reasons for the declination.
• Reviewing the parameters of the denial to determine if the loan application is eligible for a counter offer, i.e. lower loan amount or credit score exception.
• Determine if other means of documentation may be available to render an approval.
• The second signature signer determination conclusion:
• If the authorized signer disagrees with the declination, he/she should discuss the disagreement with the primary underwriter. If the loan application is determined to be an acceptable risk or is eligible for counter offer, the primary underwriter will complete the updated loan disposition and notify the retail processor and loan officer or the wholesale coordinator and account executive of the new conditional loan approval.
-OR-
• If the authorized signer agrees with the declination, he/she will co-sign the statement of denial along with the primary underwriter. The primary underwriter will then upload the fully executed statement of denial into the LOS per the Encompass support-job aid titled Adverse Applications.

As a federally insured savings institution, Provident Bank is required to have a policy that limits overall credit risk exposure and loan committee approval requirements for all loans placed in the bank’s portfolio. To ensure compliance with this policy, the bank requires additional approval requirements on any combination of loans to one borrower (LTOB) that exceeds $15,000,000.00. The LTOB determination includes the full obligation of any loan to the borrower and any loan that lists the same individual as a guarantor.

All lending divisions of the bank are required to implement procedures to review the current LTOB exposure in relationship to any new loan, any new pool loan or new guarantor status under consideration at loan submission, loan approval and prior to disbursement of funds.

• SFR’s LTOB (Loans To One Borrower) Credit Limit Exposure:
• $3,000,000.00
• Processor or coordinator to run and underwriter to review the LTOB-Credit Limit Exposure Report utilizing the borrower’s social security number for all retail, wholesale, correspondent and pool loans.
• The report is to be placed in the LOS system under the LTOB Credit Limit Exposure Report place holder or in the loan file for pool loans.

SFR’s underwriting exception procedures define the process of obtaining an underwriting exception to our published program guidelines. This applies to all delivery channels. SFR originates loans through wholesale, correspondent and retail delivery channels and purchases loans through bulk agreements.

SFR publishes program guidelines for its portfolio loan products with the knowledge that there may be instances when a loan does not meet the published criteria and requires an exception to the loan product guidelines. Exceptions to the guidelines are evaluated on a case-by-case basis, utilizing the compensating factors that are defined and properly documented for that particular loan transaction.

SFR underwriters are responsible for underwriting the entire loan package and assessing the total risk of the file inclusive of the exception request. The underwriter initiates the process by discussing the exception with the SFR Underwriting Manager or Sr. Loan Committee (Executive) depending on the nature of the exception prior to approving the loan file and exception request. Once the exception has been approved or denied, the underwriter completes the loan exception request screen within the loan origination system (LOS) and obtains the proper signing approval prior to rendering the SFR final loan approval.

All fully executed approved or denied program guideline exception requests are tracked within the LOS and an SFR exception report, whether approved or denied, is provided to the Provident Bank board of directors quarterly.

• Income, minor credit, asset and collateral exceptions are approved by the SFR Underwriting Manager.
• Loan amount, cash-out amount, credit score, major credit and occupancy exceptions are approved by a Sr. Loan Committee or Sr. Loan Committee Executive member.

Mortgage Assumption
When a borrower sells a mortgaged property and the property purchaser assumes the outstanding mortgage debt without a release of liability, the borrower has a contingent liability.

The underwriter is not required to count this contingent liability (PITIA) as part of the borrower’s recurring monthly debt obligations if the underwriter verifies that the property purchaser has at least a 12-month history of making regular timely payments for the mortgage. The underwriter can document by obtaining the following:

• evidence of the transfer of ownership;
• a copy of the formal, executed assumption agreement; and
• a credit report indicating that consistent and timely payments were made for the assumed mortgage.

If the underwriter cannot document timely payments during the most recent 12-month period, the applicable mortgage payment (PITIA) must be counted as part of the borrower’s recurring monthly debt obligations.

See Portfolio Conforming & Jumbo Underwriting Guidelines for U.S. and Non-U.S. Citizens.

Co-borrowers are acceptable provided that all parties sign the note and take title to the property.

First-time homebuyers are defined as borrowers who have not owned real estate property in the past three (3) years.

• Provident Bank recognizes the inherent risk of financing first-time homebuyers (FTHB) and the need to protect the borrower from participating in a program that may have a negative impact on the borrower’s credit profile over an extended period of time.

See Portfolio Conforming & Jumbo Underwriting Guidelines for specifics.

Owner Occupied Principal Residence

• Borrowers stated intent to occupy;
• Property location has relatively reasonable proximity to borrower’s place of employment;
• If the transaction is a refinance, then the borrower’s tax returns, W-2’s, etc., should indicate the subject property address, as the mailing address;
• Property possesses the physical characteristics to accommodate the borrower’s immediate dependent family as listed on the (1003/URLA) Uniform Residential Loan Application.

Second Homes

• Must be a reasonable distance away from borrower’s primary residence;
• Must be occupied by the borrower for some portion of the year;
• Restricted to 1-unit dwellings;
• Must be suitable for year-round occupancy;
• Must not be subject to a rental agreement and the borrower must have exclusive control over the property.

Purchase, Limited Cash Out, Cash Out and Closed End Second Trust Deeds (See product matrices and program guidelines for eligibility requirements)

Purchase Transactions

• All purchase transactions require a copy of the fully executed sales contract and all addendums.

Limited Cash Out Refinance Transactions (Internal Construction Loans)

• Pay for construction costs to build the home for single-closing construction-to-permanent loans, which may include paying off an existing lot lien.

Non-Contingent Second Trust Deeds
A non-contingent second trust deed occurs when you have a first trust deed application that will not close concurrently with a new second trust deed. The applicants are “pre-approved” for a stand-alone second, non-contingent to the new first. This concept could apply to a purchase or a refinance.

• It is imperative that this second is treated as a stand-alone second. This will require a separate loan application, dated after the recording of the new first trust deed.
• Loan transaction for the first trust deed is completely processed, underwritten and closed before the application for the second is created.
• The following credit package documents from the first loan transaction can be used for the new second trust deed (as long as the documents adhere to the age of documents guidelines).
• Credit Report (soft-pull required if > 45 days old at funding)
• The following items from the first cannot be used in the new second and must be dated after the closing and recording of the first loan transaction:
• The initial application
• The escrow instructions
• The preliminary title report (must reflect the new first loan transaction)

If these procedures are not followed correctly, the final title policy for the new first transaction will reflect both liens, resulting in an ineligible mortgage loan transaction.

Borrower may pay additional fees and payments in connection with purchasing a short sale property that are typically the responsibility of the seller.

Examples of short sale fees and payments include, but are not limited to the following:

• Short sale processing fee (i.e., short sale negotiation fees, buyer discount fees, short sale buyer fees).
• The short sale processing fee is not a common and customary charge and must be treated as a sales concession if any portion is reimbursed by an interested party to the transaction.
• Negotiated short payoff to a subordinate lien holder, and
• Payment of delinquent taxes or delinquent homeowners association (HOA) dues.

Note: The above referenced fees are non-Loan Estimate fees.

These fees and payments cannot be financed into the loan amount and must be included on the settlement statement. Borrowers must fund the cost of additional fees and payments with their own funds. The additional funds to complete the transaction must be documented.

• Sales contract will identify if the property being purchased is a short sale property.
• The transaction must be an arm’s length transaction (i.e. all parties are unaffiliated and unrelated).
• Underwriter must diligently review these purchase transactions for unusual fees, payments, and other possible red flags that could indicate fraudulent activity related to the short sale.
• Maximum allowable short sale fees that can be paid by borrower are 3% of the sales price.

All funds used for down payment, closing costs and reserves must be documented.

Any indications of borrowed funds, such as a recently opened account, a recently received large deposit, and/or an account balance that is considerably greater than the average balance over the previous two months must be investigated. Bank statements used for verifying assets must also be reviewed for monthly recurring payments, such as student loans, time shares, tax liens, etc., that would be required to be included in debt ratios.

• Down Payment
• For purchase money loans, sufficient funds to cover the down payment and closing costs must be verified. See Portfolio Conforming & Jumbo Underwriting Guidelines for borrower minimum contribution requirements.
• To determine the amount of money a purchaser needs to close a mortgage transaction, use this calculation:
• Total closing costs + down payment + reserves funds from borrower – initial deposit to escrow – seller and/or lender credits = estimated cash to close. Lender credit derived from premium pricing is not an acceptable source of funds for down payment or reserves.

See Portfolio Conforming & Jumbo Underwriting Guidelines (Assets) for requirements on the following:

• Checking & Savings
• Marketable Securities
• Retirement Assets
• Large Deposits
• Business Funds
• Restricted Stock
• Stock Options
• Foreign Assets
• Sale of Personal Assets
• Sale Proceeds from Real Estate Owned
• Bridge Loans
• Rent Credit with Option to Purchase
• Virtual Currency
• Trust Accounts
• Borrowed Funds Secured by an Asset

Unacceptable Funds - See Portfolio Conforming & Jumbo Underwriting Guidelines (Assets) for specifics:

• Cash on Hand
• 1031 Exchange Funds
• Sweat Equity
• Unacceptable Borrowed Funds

See Portfolio Conforming & Jumbo Underwriting Guidelines (Gift Funds) for requirements on the following:

• Gift Funds
• Gift of Equity

Verification of Deposits and Assets
Asset verification, including verification of deposit (VOD), bank statements and retirement account statements must contain the following:
Direct Account Verifications (VOD’s):

• Identify the financial institution
• Identify the account owner(s)
• Identify the account number, which at a minimum must include the last four digits
• Identify the type of account
• Identify the current account balance
• Identify the average balance for the previous two months
• Identify any outstanding loans secured by the asset
• Include the title, signature and phone number of the depository representative who completed the verification

When using a VOD, the underwriter must include documentation of the source of funds when an account is opened within 90 days of verification and/or when the current balance in an account is significantly greater than the average balance.

Asset account statements (bank statements, retirement accounts, etc.):

• Identify the financial institution
• Identify the account owner(s)
• Identify the account number, which at a minimum must include the last four digits
• Show all transactions
• Show the period covered
• Show the ending balance
• Show any outstanding loans secured by the asset

When bank statements are provided, borrower must include all pages even if the last page is blank (i.e. – If the statement says 1 of 5, all 5 pages are needed).

A transaction history that is computer-generated and downloaded by the borrower from the internet or by a financial institution representative from the institution’s system is acceptable. The transaction history must identify the name of the institution and the source, and include the information required above for asset account statements, unless:

• It is used in combination with other asset verifications containing the missing information, and
• It can clearly establish that the transaction history pertains to the same account.

Cash Deposit on Sales Contract (Earnest Money)

If the earnest money check has not cleared the borrower’s bank account, the amount can be included in a depository account, such as a checking or savings account. If the earnest money check has cleared the borrower’s bank account, the amount can be entered as Earnest Money in section 2b. of the 1003/URLA, where it is assumed to be verified. Underwriter to ensure the earnest money deposit is not counted twice in the evaluation of the assets.

Some closing costs and prepaid settlement costs generally are paid by the property purchaser, while other costs are the responsibility of the property seller. Other costs may be paid by either the property purchaser or the property seller. When any costs that are normally paid by the property purchaser are paid (indirectly or directly) by someone else, they are considered to be interested party contributions (IPCs). All IPCs may be paid by any interested party to the property sale transaction, although we may impose limitations on the amount of the contributions.

An interested party is anyone (other than the property purchaser) who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property. This includes the property seller, the builder/developer (or an affiliate who may benefit from the sale of the property), and the real estate agent or broker. A lender or employer is not considered an interested party unless it is the property seller or affiliated with the property seller or another interested party to the transaction.

Interested Party Contributions

Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else who has financial interest in, or can influence the terms and the sale or transfer of, the subject property. A Provident Bank or broker credit derived from premium pricing is not considered an IPC even if Provident Bank or broker is an interested party to the transaction.

Interested party contributions are limited according to the CLTV:

• CLTV ≤ 75% is limited to 9%
• CLTV > 75% is limited to 6%

NOTE: IPCs are not permitted to be used for borrowers down payment, reserve requirements or to meet minimum borrower contribution requirements.

For underwriting purposes, the underwriter must make a downward adjustment to the sales price of the property to reflect the amount of any contributions that exceed the limitations. In addition, the cost of any contributions that are in the form of personal property (such as furniture, decorator items, automobiles, club memberships, or other “giveaways”) always must be deducted from the sales price of the property. The maximum LTV ratio (or CLTV) must then be calculated based on the lesser of the reduced sales price or the appraised value.

Some seller contributions, such as moving expenses, payment of various fees on the borrower’s behalf, “silent” second mortgages held by the property seller, P&I abatements, and other contributions not disclosed on the settlement statement, often are given to home buyers outside of loan closing. These undisclosed contributions tend to reduce the effective sales price of a property; therefore, they may compromise the loan-to-value ratio for a mortgage. Consequently, a mortgage with undisclosed seller contributions is not eligible.

Lender Contributions
A lender-sourced contribution may not be:

• used to fund any portion of the down payment,
• subject to repayment requirements, or require financial obligation apart from the subject mortgage, or
• passed to Provident Bank from a third party.

The amount of the Provident Bank or broker credit should not exceed the amount of the borrower-paid closing costs and prepaids.

A 3-file merge credit report from an independent consumer-reporting agency is required. All information in the applicant’s credit report must be obtained from, or verified by, sources other than the applicant. The consumer reporting agency must contact at least two national repositories of accumulated credit records for each locality in which the borrower has lived during the most recent two-year period. When co-borrowers have individually obtained credit, separate repository inquiries are necessary. The results of both reports may be combined in one residential mortgage credit report if the report clearly indicates that this has been done. If a credit report is over 45 days old at funding, a soft-pull credit report must be pulled (no FICOs needed) to determine any changes. If there are no significant changes on soft-pull report compared to original credit report, the original credit report can be used to fund the loan, but cannot be older than 120 days at funding.

Note: A copy of the soft-pull is to be placed under credit in the LOS.

Credit Report – General Requirements

• The report must include both credit and public record information for each locality in which the borrower has resided during the most recent two-year period.
• The report must include all discovered credit and legal information that is not considered obsolete under the Fair Credit Reporting Act. The Fair Credit Reporting Act currently specifies that credit information is not considered obsolete until after seven years, and bankruptcy information after ten years.
• The report must be an original report, with no erasures, white-outs, or alterations. An automated credit report is considered to be an "original" report.
• The report must include the full name, address, and telephone number of the credit reporting agency, as well as the names of the national repositories that the agency used to provide information for the report.
• The credit reporting agency must make responsive statements about all items on the credit report – indicating “unable to verify” or “employer refused to verify,” when appropriate.
• The credit report must indicate the dates that accounts were last updated with the creditors. Each account with a balance must have been checked with the creditor within 90 days of the date of the credit report.

Public Records Information

The report must include all available public records information, identify the sources of the public records information, and disclose whether any judgments, foreclosures, tax liens, or bankruptcies were discovered (with these adverse items reported in accordance with the Fair Credit Reporting Act and to the extent reported by consumer reporting agencies participating in the National Consumer Assistance Plan). Public records information must be obtained from two sources, which may include any combination of the following:

• National repositories of accumulated credit records
• Direct searches of court records by employees of Provident Savings Bank or the consumer reporting agency, or
• Record searches made by other public records search firms.

Acceptable and Unacceptable Changes

Collected credit report information should not be changed. However, it is possible to delete duplicate information, translate codes to plain language, and make appropriate adjustments to resolve conflicting information to ensure the clarity of the report.

The following types of changes are unacceptable:

• Deleting tradelines that pertain to a borrower’s bankruptcy,
• Adding a payment amount to a creditor’s tradeline when the creditor does not require a payment, or
• Restricting information collection to a shorter time period.

Credit repositories should only change the information called to its attention by a creditor or a party that is not associated with either the real estate or purchase transaction or the mortgage financing.

Required Creditor Information
For each debt listed, the report must provide:

• The creditor’s name,
• The date the account was opened,
• The amount of the highest credit,
• The current status of the account,
• The required payment amount,
• The unpaid balance, and
• A payment history.

The report must indicate the dates that accounts were last updated with the creditors. Each account with a balance must have been checked with the creditor within 90 days of the date of the credit report.

Potential Identity Theft Red Flags

• A fraud or active-duty alert is included with a consumer report.
• Underwriter must contact the borrower as instructed by the alert on the credit report and document the file.
• A consumer reporting agency provides a notice of address discrepancy.
• Borrower should explain the discrepancy if they can and underwriter must investigate and clarify using title reports, property profiles, etc.
• Frozen credit must be unfrozen prior to approval and reviewed.
• Documents provided for identification appear to have been altered or forged.
• Documents that appear altered/forged are not acceptable and may result in denial.
• The photograph or physical description on the identification is not consistent with the appearance of the applicant or customer presenting the identification.
• Notary must verify borrower’s identity with a photo ID. This ID must also be used to complete Patriot Act.
• Other information on the identification is not consistent with information provided by the person opening a new account or customer presenting the identification.
• Underwriter must question any inconsistent identification/information and document accordingly.
• Other information on the identification is not consistent with readily accessible information that is on file with the financial institution or creditor, such as previous loan information and /or signatures are not consistent.
• Underwriters and funders must investigate any inconsistencies/variances and document accordingly.
• An application appears to have been altered or forged, or gives the appearance of having been destroyed and reassembled.
• We do not accept alterations on any documents. Check consistencies of all signatures. Compare signatures against the original 1003/URLA and any notarized documents and/or signature on Driver’s License.
• The address does not match any address in the consumer report or the Social Security Number (SSN) has not been issued, or is listed on the Social Security Administration’s Death Master File.
• Borrowers must explain any additional addresses found and the underwriter should pull property profiles on all property addresses associated with the borrower to determine any ownership responsibility.
• SS numbers must be verified through the Social Security Administration to determine the numbers accuracy and verify it belongs to our borrower.
• Personal identifying information provided by the customer is not consistent with other personal identifying information provided by the customer. For example, there is a lack of correlation between the SSN range and the date of birth.
• PB requires all borrower’s SS #’s and birth dates to be verified through the Social Security Administration. Any discrepancies must be addressed by the borrower(s) and determined to be reasonable and accurate by the underwriter.
• The address on an application is the same as the address provided on a fraudulent application or the phone number on an application is the same as the number provided on a fraudulent application.
• A Data Verify must be run on all loans to cross reference all address, phone numbers and any reported fraud that may be associated with them.
• The address on an application is fictitious, a mail drop, or a prison.
• Underwriter to pull property profile and/or Data Verify to confirm type of property listed and confirmation of ownership.

Any information in a file that is found to be fraudulent will result in denial and the information to be forwarded to our Security Officer for reporting to the appropriate agencies.

Reviewing the Credit Report
The following items should be considered when reviewing the credit report:

• Payment history on previous mortgage – Should cover activity for the previous 12 months or longer;
• Undisclosed debt – If the credit report reveals significant debt that the borrower did not disclose on the application, he or she may have been attempting to conceal liabilities in order to qualify for the mortgage. The borrower may need to provide a written explanation for the omission at underwriter discretion.
• Revolving accounts – When revolving accounts with outstanding balances do not have stated minimum required payments, payments should be calculated at the greater of 5% of the outstanding balance or $10;
• Frozen credit – Must be unfrozen prior to approval.

Documenting Previous Mortgage Payment History

The underwriter must review the borrower’s credit report to determine the status of all mortgage accounts. If a borrower had previous mortgages, the underwriter does not have to independently verify the mortgage’s payment history provided the credit report includes a reference to the mortgage (or mortgages) and reflects 12 months of the most recent payment activity.

If adequate mortgage payment history is not included in the borrower’s credit report, the underwriter must use the following to verify the borrower’s payment history on a previous mortgage(s):

• A standard mortgage verification;
• Loan payment history from the servicer;
• The borrower’s canceled checks, or bank statements, for the last 12 months;
• The borrower’s year-end mortgage account statement provided the statement includes a payment receipt history, and, if applicable, canceled checks for the months elapsed since the year-end mortgage account statement was issued.

Standard Mortgage Verifications from Servicers
When relying on standard mortgage verifications from servicers or holders, ensure that the verifications include:

• The unpaid principal balance of the mortgage and monthly payment amount,
• The present status of the mortgage, such as current, 30 days delinquent, etc., and
• The borrower’s payment history.

When a servicer fails to provide all of the requested information, the underwriter must rely on information provided through the borrower’s canceled checks. The checks must:

• Be legible,
• Identify the mortgage servicer or mortgage holder as the payee,
• Indicate that the servicer or holder endorsed the check for deposit, and
• Indicate the date the servicer or holder deposited the check.

Existing Mortgage Payment Requirements

On the date of the loan application, the borrower’s existing mortgage must be current, which means that no more than 30 days may have lapsed since the last paid installment date.

Mortgage Delinquency

The underwriter must review the borrower’s credit history to determine previous mortgage delinquency severity (e.g., 30, 60, or 90 days), and recent delinquency. Loans with excessive prior mortgage delinquencies are not eligible. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more 30, 60, 90, 120, or 150-day delinquency reported within the 12 months prior to the credit report date.

Timeshare accounts identified as mortgage tradelines are not required to meet the requirements described above, and are considered to be installment accounts.

Accuracy of Credit Information in a Credit Report

If a borrower indicates that any significant information in the credit file is inaccurate, such as reported accounts that do not belong to the borrower or derogatory information that is reported in error, the underwriter should carefully review the credit information, then request that the credit reporting company that provided the information confirms its accuracy.

Credit History

The borrower’s credit history should demonstrate his or her past willingness and ability to meet credit obligations in a way that will enable the underwriter to draw a logical conclusion about the borrower’s commitment to making payments on the new mortgage obligation that he or she is taking on.

The borrower’s credit history over the past seven years should be reviewed to determine whether there are any major indications of derogatory credit.

Credit Inquiries

The underwriter must review the section of the borrower’s credit report that indicates the presence of creditor inquiries to determine the number and age of the inquiries. Recent inquiries may indicate that the borrower has been actively seeking new credit accounts. The presence of a large number of unrelated inquiries represents higher credit risk (whether or not the borrower actually obtained credit as a result of the inquiry). The presence of many recent inquiries in combination with a significant number of recently opened accounts or delinquent accounts represents a higher credit risk.

Credit Scores

FICO bureau credit scores provide an indication of the relative likelihood of credit risk and can direct the underwriter to an appropriate level of credit review. Each loan product may include program specific credit scoring requirements and guidelines.

Loans can be approved or declined based on credit scores. Credit scores are one indication of a borrower’s willingness to repay the debt. All borrowers must have a credit score.

Adverse / Derogatory Credit

A history that consists of a minor, isolated instance of poor credit or a late payment is acceptable as long as the borrower has other credit accounts that have excellent payment records. However, if the credit history reflects a consistent pattern of slow payments, undisclosed debts, collections, judgments for nonpayment of obligations, bankruptcies, etc., these must be clearly defined and addressed as to how they impact the risk of the file.

General Information

The presence of significant derogatory credit events dramatically increases the likelihood of a future default and represents a significantly higher level of default risk. Examples of significant derogatory credit events include bankruptcy, foreclosure, deed-in-lieu of foreclosure, pre-foreclosure sale, short sale and charge-off of mortgage accounts.
Note: The terms “pre-foreclosure sale” and “short sale” are used interchangeably in this guide and have the same meaning (see Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale, and Charge-Off of a mortgage account).

The underwriter must determine the cause and significance of the derogatory information, verify that sufficient time has elapsed since the date of the last derogatory information, and confirm that the borrower has re-established an acceptable credit history. The underwriter must make the final decision about the acceptability of a borrower’s credit history when significant derogatory credit information exists.

Identification of Significant Derogatory Credit Events in the Credit Report

The underwriter must review the credit report and Section 5, Declarations, of the (1003/URLA) Uniform Residential Loan Application to identify instances of significant derogatory credit events. The underwriter must also review the public records section of the credit report and all tradelines, including mortgage accounts (first liens, second liens, home improvement loans, HELOCs, and mobile home loans), to identify previous foreclosures, deeds-in-lieu or pre-foreclosure sales, and bankruptcies. The underwriter must carefully review the current status of each tradeline, manner of payment codes, and remarks (descriptive text or codes such as “Foreclosure,” “Forfeit deed in lieu of foreclosure,” “Settled for less than full balance”, “Affected by natural disaster”) to identify these types of significant derogatory credit events.

Significant derogatory credit events may not be accurately reported or consistently reported in the same manner by all creditors or credit reporting agencies. If not clearly identified in the credit report, the underwriter must obtain copies of appropriate documentation. The documentation must establish the completion date of a previous foreclosure, deed-in-lieu or pre-foreclosure sale, confirm bankruptcy discharge or dismissal date, and identify debts that were not satisfied by the bankruptcy. Debts that were not satisfied by a bankruptcy must be paid off or have an acceptable, established repayment schedule.

Note: Timeshare accounts are considered installment loans and are not subject to the waiting periods described below.

Bankruptcy (Chapter 7 or Chapter 11)

A 7-year waiting period is required, measured from the discharge or dismissal date of the bankruptcy action.

Bankruptcy (Chapter 13)

A 7-year waiting period is required, measured from the discharge or dismissal date of the bankruptcy action.

Multiple Bankruptcy Filings

For a borrower with more than one bankruptcy filing, a 7-year waiting period is required, measured from the most recent dismissal or discharge date.

Note: The presence of multiple bankruptcies in the borrower’s credit history is evidence of significant derogatory credit and increases the likelihood of future default. Two or more borrowers with individual bankruptcies are not cumulative, and do not constitute multiple bankruptcies. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy, this is not considered a multiple bankruptcy.

Foreclosure

A 7-year waiting period is required, and is measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower.

Foreclosure and Bankruptcy on the Same Mortgage

If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied if the underwriter obtains the appropriate documentation to verify that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods must be applied.

Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale, and Charge-Off of a Mortgage Account
These transaction types are completed as an alternative to a foreclosure:

• A deed-in-lieu of foreclosure is a transaction in which the deed to the real property is transferred back to the servicer. These are typically identified on the credit report through remarks codes such as “Forfeit deed-in-lieu of foreclosure.”
• A pre-foreclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer. These are typically identified on the credit report through remarks codes such as "Settled for less than a full balance."
• A charge-off of a mortgage account occurs when a creditor has determined that there is little (or no) likelihood that the mortgage debt will be collected. A charge-off is typically reported after an account reaches a certain delinquency status, and is identified on the credit report with a manner of payment (MOP) code of "9."
• A 7-year waiting period is required from the completion date of the deed-in-lieu of foreclosure, pre-foreclosure sale, loan modification or charge-off of a mortgage as reported on the credit report or other documentation provided by the borrower.

Note: Deed-in-lieu and pre-foreclosure sales may not be accurately or consistently reported in the same manner by all creditors or credit reporting agencies.

See Portfolio Conforming & Jumbo Underwriting Guidelines (Credit) for requirements on the following:

• Re-establishing credit

Payoff of debt solely to qualify must be carefully evaluated and considered in the overall loan analysis. The borrower’s history of credit use should be a factor in determining whether the appropriate approach is to include or exclude debt for qualification.

Generally:

• Installment loans that are being paid off or that have 10 payments or fewer remaining do not need to be included in the borrower’s long-term debt.
• If a revolving account balance is to be paid off at or prior to closing, a monthly payment on the current outstanding balance does not need to be included in the borrower’s long-term debt, i.e., not included in the debt-to-income (DTI) ratio. Such accounts do not need to be closed as a condition of excluding the payment from the DTI Ratio.

See Portfolio Conforming & Jumbo Underwriting Guidelines (Income/Employment) for requirements on the following:

• Salaried
• Variable Income
• Hourly and Part-Time Income
• Commission
• Overtime & Bonus
• Employment Offers or Contracts
• Temporary Leave
• Borrower Employed by Family
• Self Employed
• Schedule K-1

Income Analysis Forms:

• The loan file must include an income analysis form detailing the income calculations.
• Income analysis for borrowers with multiple employers, businesses or income sources must show income/loss details separately, not in aggregate.

Analyzing a Borrower’s Employment Record

Underwriters may assume that the employment is ongoing if a borrower’s employer verifies current employment and does not indicate that employment has been, or is set to be terminated. Underwriters should not rely upon a verification of current employment that includes any indication that the employment is likely to cease, such as a statement that indicates the employee has given (or been given) notice of employment suspension or termination.

• When analyzing a borrower’s employment, underwriter must examine:
• The borrower’s past employment record, and
• The employer’s confirmation of current, ongoing employment status.
• Underwriters may favorably consider the stability of a borrower’s income if he/she changes jobs frequently within the same line of work, but continues to advance in income or benefits. In this analysis, income stability takes precedence over job stability.

Salary, Wage and Other Forms of Income

• General Policy on Borrower Income Analysis:
• The income of each borrower who will be obligated for the mortgage debt and whose income is being relied upon in determining ability to repay must be analyzed to determine whether his/her income level can be reasonably expected to continue.
• In most cases, a borrower’s income is limited to salaries or wages. Income from other sources can be considered as effective, when properly verified and documented by the underwriter.
• Effective income for borrowers planning to retire during the first three-year period must be calculated using the lower of the two pay structures and the following documentation will be required to verify the amount and duration of the retirement income:
• Documented retirement benefits,
• Social Security payments, or
• Other payments expected to be received in retirement.

Note: Underwriters may not ask the borrower about possible, future maternity leave.

Overtime and Bonus Income

• Overtime and bonus income can be used to qualify the borrower if he/she has received this income for the past two years, and documentation submitted for the loan does not indicate this income will likely cease. If, for example, the employment verification states that the overtime and bonus income is unlikely to continue, it may not be used in qualifying.
• The Underwriter must develop an average of bonus or overtime income for the past two years. Periods of overtime and bonus income less than two years may be acceptable, provided the underwriter can justify and document in writing the reason for using the income for qualifying purposes.

Primary Employment Less Than 40 Hour Work Week

• When a borrower’s primary employment is less than a typical 40-hour work week, the underwriter should evaluate the stability of that income as regular, on-going primary employment.
• Example: A registered nurse may have worked 24 hours per week for the last year. Although this job is less than the 40-hour work week, it is the consumer’s primary employment, and should be considered effective income.

Commission Income

• Borrowers whose commission income was received for more than one year, but less than two years, may be considered as acceptable income as long as there are positive factors to reasonably offset the shorter income history and if the underwriter can:
• Document the likelihood that the income will continue, and
• Soundly rationalize accepting the commission income.

Qualifying Commission Income Earned for Less Than One Year

• Commission income earned for less than one year is not considered effective income. Exceptions may be made for situations in which the borrower’s compensation was changed from salary to commission within a similar position with the same employer.

A borrower with a 25 percent or greater ownership interest in a business is considered self-employed.

There are 5 types of business structures:

• Sole proprietorships
• Corporations
• S Corporations
• Partnerships
• Limited Liability Companies (may report on IRS forms 1120S/K-1, 1065/K-1 or Schedule C)

Minimum Length of Self-Employment

• Income from self-employment is considered stable, and effective, if the borrower has been self-employed for two or more years.
• Due to the high probability of failure during the first few years of a business, the requirements described in the table below are necessary for borrowers who have been self-employed for less than two years:

General Documentation Requirements for Self-Employed Borrowers.

• Self-employed borrowers must provide the following documentation:
• Individual federal tax returns with all applicable tax schedules for the most recent two years,
• For a corporation, S corporation, LLC or partnership, federal business income tax returns for the last two years, with all applicable tax schedules, and
• Signed year-to-date profit and loss (P & L) statement.

Note: If tax returns are not validated with IRS transcripts, the tax returns must be signed and dated by borrowers.

Establishing a Self-Employed Borrower’s Earnings Trend

• The underwriter must establish the borrower’s earnings trend from the previous two years using the borrower’s tax returns.
• If the P & L statements submitted for the current year shows an income stream considerably greater than what is supported by the previous year’s tax returns, the underwriter must base the income analysis solely on the income verified through the tax returns.
• If the borrower’s earnings trend for the previous two years is downward and the most recent tax return or P & L is less than the prior year’s tax return, the borrower’s most recent year’s tax return or P & L must be used to calculate his/her income.

Analyzing the Business’s Financial Strength

• The underwriter must consider the business’s financial strength by examining annual earnings. Annual earnings that are stable or increasing are acceptable, while businesses that show a significant decline in the income over the analysis period are not acceptable.

The underwriter must confirm the stability and likelihood of continuance for each source of income that the borrower reports on their IRS Form 1040. The underwriter should not include any income that does not appear to be stable or likely to continue. The underwriter should, however, consider all recurring income that the borrower can expect to continue receiving over time.

The underwriter must prepare a written evaluation of its analysis of a self-employed borrower’s personal income, including the business income or loss, reported on the borrower’s individual income tax returns. The purpose of this written analysis is to determine the amount of stable and continuous income that will be available to the borrower. This is not required when a borrower is qualified using only salaried income (not derived from self-employment) and self-employment is a secondary and separate source of income. The underwriter may use Fannie Mae’s Cash Flow Analysis (Form 1084) or Freddie Mac (Form 91) or any other type of cash flow analysis that applies the same principles. A copy of the written analysis from the underwriter must be included in the loan file.

Income (or Loss) from a Sole Proprietorship

In analyzing a self-employed borrower’s personal income, the underwriter should focus on earnings trends and the actual sources of the income, not just on the total amount of the income.

Adjustments to Business Cash Flow

The underwriter must determine if the income is recurring or non-recurring. The following recurring items claimed by the borrower on Schedule C should be added back to the cash flow analysis: depreciation, depletion, business use of a home, amortization, and casualty losses.

The following items should be subtracted from the business cash flow:

• Non-recurring income, and
• Exclusion for meals and entertainment expenses.

Corporation

A corporation is a state-chartered legal entity that exists separately and distinctly from its owners (who are called stockholders or shareholders).

Percentage of Ownership Information

Corporate compensation to the officers is shown on the IRS 1120 corporate tax returns form 1125-E. When the borrower’s percentage of ownership is not shown, the underwriter must obtain the information from the corporation’s accountant. A corporation may also distribute profits to its shareholders in the form of dividends, which it reports on IRS Form 1099-DIV. Officers may also receive wages via W-2’s. W-2 wages can be cross-referenced with compensation to officers on form 1120.

Analyzing Corporate Tax Returns

The underwriter must evaluate the overall financial position of the corporation. Ordinary income from the corporation can be used to qualify the borrower if the following requirements are met:

• The business income must be stable and consistent,
• The sales and earnings trends should be positive,
• The business must have adequate liquidity to support the borrower’s withdrawals of cash without having severe negative effects, and
• Borrower(s) must own 100% of the corporation.

Adjustments to Business Cash Flow

Items that can be added back to the business cash flow include depreciation, depletion, amortization, casualty losses, new operating losses, and other special deductions that are not consistent and recurring.

The following items should be subtracted from the business cash flow:

• Travel and meals exclusion,
• Tax liability and amount of any dividends, and
• The total amount of obligations on mortgages, notes, or bonds that are payable in less than one year.
• These adjustments are not required for lines of credit or if there is evidence that these obligations roll over regularly and/or the business has sufficient liquid assets to cover them.

S Corporation

An S corporation is a legal entity that has a limited number of stockholders and elects not to be taxed as a regular corporation. S corporations and some LLC’s pass gains and losses on to the stockholders. An S corporation has many of the characteristics of a partnership. Stockholders are taxed at their individual tax rates for their share of ordinary income, capital gains and other taxable items.

The ordinary income for an S corporation is reported on IRS Form 1120S, with each shareholder’s share of the income reported on IRS Form 1120S, Schedule K-1.

A borrower with an ownership interest in an S corporation or LLC may receive income in the form of wages or dividends in addition to either share of business income (or loss) reported on Schedule K-1.

Percentage of Ownership Information
The borrower's share of income or loss is based on the borrower’s percentage of stock ownership in the business for the tax year as shown on IRS Form 1120S, Schedule K-1. The cash flow analysis should consider only the borrower’s share of the business income (or loss), taking into account any adjustments to the business income that are discussed below. Business income may only be used to qualify the borrower if the lender obtains documentation verifying that:

• the income was actually distributed to the borrower, or
• the business has adequate liquidity to support the withdrawal of earnings. If the Schedule K-1 provides this confirmation, no further documentation of the business liquidity is required.

It is important that the underwriter select a business liquidity formula based on how the business operates (i.e., The Quick Ratio or The Current Ratio). For either ratio, a result of 1 or greater is generally sufficient to confirm adequate business liquidity to support withdrawal of earnings.

Analyzing S Corporation Tax Returns
When the borrower has 25% or more ownership interest in the business, the underwriter must perform a business cash flow analysis in order to evaluate the overall financial position of the business and confirm:

• the business income is stable and consistent, and
• the sales and earnings trends are positive.

If the business does not meet these standards, business income cannot be used to qualify the borrower.

Adjustments to Business Cash Flow
Items that can be added back to the business cash flow include depreciation, depletion, amortization, casualty losses, and other losses that are not consistent and recurring. The following items should be subtracted from the business cash flow:

• Travel and meals exclusion,
• Other reported income that is not consistent and recurring, and
• The total amount of obligations on mortgages, notes, or bonds that are payable in less than one year.
• These adjustments are not required for lines of credit or if there is evidence that these obligations roll over regularly and/or the business has sufficient liquid assets to cover them.

Partnership

A partnership is an arrangement between two or more individuals who have pooled their assets and skills to form a business and who will share profits and losses according to predetermined proportions that are set out in the partnership agreement. A partnership may be either a general partnership or a limited partnership.

The partnership must report its profit or loss on IRS Form 1065 and each partner’s share of the profit or loss on the IRS Form 1065, Schedule K-1; however, the partnership pays no tax on the partnership income.

Each partner uses the information from IRS Form 1065, Schedule K-1, to report their share of the partnership's net profit or loss (and special deductions and credits) on their IRS Form 1040, whether or not the partner receives a cash distribution from the partnership. Individual partners pay taxes on their share of the net partnership income at their individual tax rates.

A borrower with an ownership interest in a partnership or LLC may receive income in the form of wages or other compensation from the partnership or LLC in addition to the borrower’s share of income (or loss) reported on the Schedule K-1.

Percentage of Ownership Information
The borrowers share of income or loss is based on the borrower’s partnership percentage of Ending Capital in the business as showing on the IRS Form 1065, Schedule K-1. Income from the partnerships and LLC’s can only be considered if the underwriter obtains documentation such as the Schedule K-1, verifying that:

• the income was actually distributed to the borrower, or
• the business has adequate liquidity to support withdrawal of earnings. If the Schedule K-1 provides this confirmation, no further documentation of business liquidity is required.

It is important that the underwriter select a business liquidity formula based on how the business operates (i.e., The Quick Ratio or The Current Ratio). For either ratio, a result of 1 or greater is generally sufficient to confirm adequate business liquidity to support withdrawal of earnings.

Analyzing Partnership Tax Returns
When the borrower has 25% or more ownership interest in the business and business tax returns are required, the underwriter must perform a business cash flow analysis in order to evaluate the overall financial position of the business to determine whether:

• income is stable and consistent, and
• sales and earnings trends are positive.

If the business does not meet these standards, business income cannot be used to qualify the borrower.

Adjustments to Business Cash Flow
Items that can be added back to the business cash flow include depreciation, depletion, amortization, casualty losses, and other losses that are not consistent and recurring. The following items should be subtracted from the business cash flow:

• Travel and meals exclusion,
• Other reported income that is not consistent and recurring, and
• The total amount of obligations on mortgages, notes, or bonds that are payable in less than one year.
• These adjustments are not required for lines of credit or if there is evidence that these obligations roll over regularly and/or the business has sufficient liquid assets to cover them.

See Portfolio Conforming & Jumbo Underwriting Guidelines (Other Sources of Income) for requirements on the following:

• Alimony, Child Support and Separate Maintenance Payments
• Auto Allowance
• Boarder Income
• Capital Gains Income
• Disability Income – Long Term
• Employment-Related Assets as Qualifying Income
• Foreign Income
• Foster Care Income
• Housing or Parsonage Allowance
• Interest/Dividend Income
• Non-Taxable Income
• Note Income
• Retirement Income (Pension, Annuity, and IRA Distributions)
• Royalty Payment Income
• Social Security Income
• Trust Income
• Seasonal Employment

See Portfolio Conforming & Jumbo Underwriting Guidelines (Rental Income) for requirements on Rental Income.

See Portfolio Conforming & Jumbo Underwriting Guidelines (IRS Form 4506-C Tax Transcripts) for requirements on validating income documentation.

Estimating Monthly Hazard Insurance Premium
Loan Amount x .0035 divided by 12 = monthly figure

Estimating Monthly Property Taxes and Mello-Roos/Special Assessments

All jurisdictions of California have various assessments and bond fees according to that jurisdiction. Processor/Underwriter must complete the “Tax Calculation Worksheet” (located in Provident Bank > Policies and Procedures > Forms) for the calculation of estimated monthly property taxes. Form must be placed on top of the preliminary title report in the loan file.

• If the exact tax rate and mello-roos/special assessments are not available, calculate monthly tax figure as follows:
• Purchase – sales price x .0150 divided by 12
• Construction-to-Permanent Financing – appraised value x .0150 divided by 12
• Refinances – property taxes from preliminary title report divided by 12
• Refinances of properties owned less than 12 months or has not been reassessed since purchase – property taxes are calculated based on the sales price x current tax rate + any special assessments divided by 12.

Underwriter must base its calculation of real estate taxes for borrower qualification on no less than the current assessed value. (Taxes are listed on the title commitment.) However, the underwriter may (or must in some circumstances) project the real estate taxes if one of the following applies:

• If the amount of taxes will be reduced based on federal, state, or local jurisdictional requirements. However, the taxes may not be reduced if an appeal to reduce them is only pending and has not been approved.
• If the transaction is new construction, the underwriter must use a reasonable estimate of the real estate taxes based on the value of the land and completed improvements.
• There is tax abatement on the subject property that will last for no less than 5 years from note date. For example:
• For a municipality with a 10-year abatement, the underwriter may qualify the borrower with the reduced tax amount;
• For a municipality with 10-year abatement and with annual real estate tax increases in years 1 through 10, underwriter must qualify the borrower with the annual taxes that will be required at the end of the 5th year after the first mortgage payment date.

Estimating Flood Insurance
Loan amount x .0035 divided by 12 = monthly figure; or if available use amount from insurance policy

• Coverage for individual policies must be equal to the lesser of:
• 100% of the replacement cost value of the improvements, or
• the unpaid principal balance of the loan, provided it equals no less than 80% of the replacement cost value of the improvements.
• The maximum allowable deductible for insurance covering a property is 5% of the property insurance coverage amount. When a policy includes multiple deductibles, such as a separate deductible that applies to windstorms, or a separate deductible that applies to a specific property element such as the roof, the total amount for such deductibles applicable to a single occurrence must be no greater than 5% of the property insurance coverage amount.
• Lender’s Loss Payable endorsement (CA 438BFU). Always verify insurance company will issue the 438BFU. Not required on Master Insurance Policies.
• 4 months remaining coverage for refinance transactions, 12 months for purchase transactions.
• Insurance companies must be rated in the A.M. Best Guide with a rating of A- or better. (California Fair Plan and Lloyds of London are acceptable insurance companies without meeting this requirement).
• PUD projects – Individual property insurance policies (HO-3) are required unless the project’s legal documents provide for a master property insurance policy that covers both the common elements and the residential structures. If a master policy is provided and it does not cover the interior of the unit then a walls in policy (HO-6) is required. If an individual policy (HO-3) is provided, then a master policy is not required.
• Condo projects – Master property insurance policies are required for common elements and residential structures unless the condo project’s legal documents require an individual property insurance policy (HO-3) for each unit. Master insurance policy must also provide general liability and fidelity coverage. If the master policy does not cover the interior of the unit, then a walls in policy (HO-6) is required. If an individual policy (HO-3) is provided, the master policy is still required to verify the common elements are covered. A master policy is not required on a detached condo that is covered by an individual policy (HO-3).
• Master Insurance Policies must be in an amount at least equal to 100% of the replacement cost value of the project improvements, including common elements and residential structures. An insurance policy that includes any of the following coverage, either in the policy language or in a specific endorsement to the policy is acceptable:
• Guaranteed Replacement Cost,
• Extended Replacement or
• Replacement Cost.

See Portfolio Conforming & Jumbo Underwriting Guidelines (Solar Panels) for requirements.

• Mortgage Insurance coverage – Refer to approved MI Company for specific guidelines and price quotes.
• Approved Mortgage Insurance Companies:
• ESSENT: www.essent.us
• MGIC: www.MGIC.com
• ENACT: www.ENACTMI.com
• ARCH: https://mi.archcapgroup.com/

Provident Bank Offers the Following MI Products

• Zero Option Monthly BPMI – A borrower may pay a MI premium in addition to their monthly payment. The first premium will be collected with the first or second loan payment.
• Single Premium Cash BPMI – A borrower may pay on MI premium in cash at closing.

NOTE: All loans that require Borrower Paid Mortgage Insurance are subject to MI approval. Contact one of the approved MI companies above for guidance. Underwriter(s) are required to make sure the mortgage insurance companies are using the correct forms when obtaining the mortgage insurance certification. The Approved Mortgage Insurance Forms list can be found on Fannie Mae’s website.

LPMI at or Below 80% LTV
Based on market conditions Provident Bank may require Monthly LPMI for loans at or below 80% LTV.

Underwriting the Preliminary Title Report

Underwriters are responsible for underwriting the preliminary title report. The underwriting process includes marking each item on the Schedule B either “in or out.” Underwriters are responsible for giving instructions to the closing department. These instructions must be clear and consistent. The underwriter must add required endorsements.

Closing Protection Letter dated within 30 days of funding is required on all loans.

Private transfer fee covenants may be attached to real property by the owner or another private party, or the property developer and provide for a transfer fee to be paid to an identified third party, such as the developer or its trustee, upon each resale of the property. The fee typically is stated as a fixed amount or as a percentage, such as one percent of the property's sales price, and often exists for an extended period of time. Underwriters are required to ensure that properties approved under Provident Bank Guidelines are not secured by properties encumbered with a private transfer fee that are unacceptable.

Provident Bank’s Appraisal Underwriting Guidelines for Residential Units is published as our uniformed guide to the evaluation process.

Note: The appraisal review policy is included in the Appraisal Underwriting Guidelines. All appraisal underwriting must be documented on the appraisal underwriting checklist in the LOS.

The following pre-funding quality control reviews are required on all closed loans:

• Run Data Verify.
• Names and/or parties must be spelled correctly when run through LDP/GSA in Data Verify.
• Appraisal Review if deemed necessary by the underwriter or product guidelines.
• Appraisal Check List completed by the underwriter in the LOS.
• 4506C to be processed on all loans.
• Social Security verification review of any conventional loan that has any kind of SS# alert found in the credit report or on the Data Verify or any other place in the file.
• MERS to be run twice on all loans at processing/underwriting and funding to determine no new mortgages.
• Verbal VOE’s to be done by processor or funder within 10 days prior to the note date and at time of funding.
• Credit report to be no more than 45 days old at time of funding. If credit is aged a soft-pull updated report (do not need FICOs) must be run.
• Verify initial and final loan application is signed by the borrower and loan officer. NMLS number for the loan officer must be reflected on both initial and final loan application.

The above requirements have been standardized to apply to all retail, wholesale, and correspondent loan transactions.

Data Verify - An audit tool to be run on all loans prior to closing. The ID Verify and App Verify scores must be equal to or greater than 700. All findings in the “High Caution” range must be cleared by the underwriter with appropriate documentation or comments placed in the loan file. All findings in the “Medium” and “Low Caution” ranges must be reviewed for red flags and possible clearance. “Medium” and “Low” range findings deemed insignificant may have to be cleared to bring the score to 700+.

Appraisal Review - Field or desk appraisal reviews are at the discretion of the underwriter unless required by specific program guidelines.

Appraisal Checklist - is a tool for the underwriter to use to make sure the appraisal is thoroughly analyzed at underwriting and specific declining market requirements are met.

4506-C - must be processed on all loans. The results must match/support the income documentation in the file. If the results reflect additional earnings/loss this income/loss must be documented, addressed, and taken into consideration in qualifying.

Social Security Number Verification - All loans require this when there is any discrepancy or variation in the credit report or the Data Verify or any other place in the loan file. Social Security number must be consistent throughout the file (1040s, W-2’s, check stubs, credit report, etc.).

Verbal VOE - A verbal VOE must be performed at clear to close and again at funding. The verbal VOE at underwriting must include the borrower’s dates of employment and position. If the employer mentions future layoff or deferments, loan may not fund and the file must go back to the underwriter for further review. The verbal verification must be obtained within 10 business days prior to the note date and again at funding for employment income and self-employment income.

Note: Any change in the borrower’s employment status could have significant impact on the borrower’s capacity to repay the mortgage loan and must be fully reevaluated.

Credit Report Age - The credit report used to qualify the borrower may not be older than 45 days at funding. The purpose of this is to determine that no new financing has occurred which could affect the qualification of the specific transaction and that there has been no new derogatory credit established. If a soft-pull update is needed, FICOs are not required unless there are significant changes found on the soft-pull report. Any significant changes such as newly opened accounts increase in accounts that would affect ratios, derogatory credit etc. would require re running of DU with updated credit and FICOs. The loan would then need to be re-qualified and changes made in the loan operating system. If there are no changes on the soft-pull compared to the existing credit report, the existing credit report can be used to fund the loan, but cannot be more than 120 days old. Major changes could possibly result in a need to restructure or decline the loan.

Should any of the above pre-closing QC procedures reflect inconsistencies or misrepresentation, the file and its findings must be sent to Provident Bank QC department for immediate review. A cover letter explaining the concerns must accompany the file. The QC department will review the findings and if applicable will issue a Suspicious Activity Report (SAR) and notification to the appropriate departments.

Risk is a characteristic that denotes a potential negative impact to the salability and/or performance of a loan. The layering of risk characteristics increases the probability of a negative impact on the salability and/or performance of a loan. Risk characteristics are attributes of each loan that impact the borrower’s motivation or capacity to repay the mortgage loan.

When a number of risk factors are present without sufficient compensating factors, their cumulative effect can dramatically increase the likelihood of default. This is referred to as layered risk. Loans with layered risk characteristics can be measured through early payment default, common risk and quality errors, unsalable loans, and repurchase requests. Loans with risk and quality errors historically correlate to higher defaults. The following information provides guidance in the form of observations and recommendations specific to how loan scores, along with common risk and quality errors are related to layered risk.

Document the comprehensive risk decision; provide a written statement for the underwriting rationale used to approve.

Completing a comprehensive risk assessment, along with addressing common risk and quality errors is important to originating well underwritten loans. Implementing and promoting responsible lending practices is critical to protecting borrowers and Provident Bank.