Many mortgage professionals are, unfortunately, becoming more familiar with the old adage “What you don’t know can hurt you,” especially when it comes to undisclosed liabilities that occur during the loan underwriting process. According to a study recently conducted by a national lender, a review of approximately 4,500 loans over a three-month period revealed that nearly 1,000 borrowers had opened new trade lines between the initial application and final sign-off date. These new trade lines carried an average payment of $300, which then required a minimum increase of some $9,400 in net income to absorb the payment and keep borrowers’ debt-to-income (DTI) ratio change at less than three percent. It’s not hard to imagine the added time and expense that would be incurred if this type of activity was discovered the day before the loan was scheduled to close.
Unfortunately, misrepresentation of liabilities continues to be a growing issue, and one that challenges mortgage professionals to be at the top of their games when it comes to loan quality control methods. Consider Fannie Mae’s 2011 through April of 2012 loan review fraud findings—in 45 percent of potentially fraudulent cases, the borrowers’ liabilities were found to be misrepresented in some way. This significant increase over Fannie Mae’s 2010 findings, which showed 26 percent liability misrepresentation, underscores how important it is to closely monitor and address undisclosed liabilities.
Digitally connected through continuous monitoring
While most mortgage professionals handle a healthy percentage of low-risk loans as compared with those deemed questionable or high-risk, the challenge still remains: How can the questionable borrowers, as well as their undisclosed liabilities, be better identified?
Fannie Mae’s Loan Quality Initiative recommends credit checks be pulled during the initial application, and then again before closing to ensure no undisclosed liabilities appear. Debt incurred during this “quiet period,” the time between the original credit pull and the loan closing, can greatly impact a borrower’s debt-to-income ratio and delay closing.
Quality control (QC) programs, such as Undisclosed Debt Monitoring powered by Equifax, inject more transparency into borrower credit activity by providing continual monitoring of borrower files during the “quiet period.” These QC tools provide daily alerts highlighting potential risk areas associated with undisclosed liabilities, as well as other activity that could negatively impact a borrower’s loan application.
By identifying potential risks before loans are scheduled to close, QC tools deliver strong pull-thru rates, better pricing and enable lenders to proactively work with borrowers and offer input throughout the entire loan process.
Consider two hypothetical scenarios: The first situation involves a borrower who purchases new furniture on credit 15 days after his original loan application, which changes his DTI ratio from 30 percent to 38 percent. Through the use of QC technology, the loan officer is notified immediately of this transaction and has time to work with the borrower so the loan can still close on time.
Now, imagine a similar situation with one change—the mortgage professional does not learn of the borrower’s furniture charge (and its impact on his DTI ratio) until two days before the loan is scheduled to close. The change in DTI ratio would delay closing and the rate lock would expire. These delays could ultimately result in less profit for the mortgage professional, depending on the cost to extend the term and the additional documentation required.
Targeted activity alerts lead to immediate action
QC tools actively monitor trade lines, credit inquiries and secondary re-issued files on loans that have been pre-approved and/or likely to close. Secondary re-issue alerts quickly let lenders know when a borrower is shopping around for a mortgage or trying to commit some type of fraud. Alerts enable lenders to start an immediate conversation with the borrower, which may help him/her save the loan and keep the relationship intact.
Lenders have access to comprehensive, user-friendly reports that are automatically generated for all borrower-related activity. By monitoring these types of activities, lenders can streamline their loan underwriting and QC efforts.
Other areas of borrower misrepresentation
Undisclosed liabilities that impact DTI ratios are just one of six key areas that could harbor significant borrower representation during the underwriting process. The other areas that lenders are encouraged to monitor include:
++Income: Represented 15 percent of borrower misrepresentation according to a 2011 through April 2012 Fannie Mae loan review fraud findings from 2011 through April 2012. This rate was 25 percent in 2010. Income monitoring and verification can be streamlined through the use of tax return verification reports that easily compare income-related lines of a borrower’s tax return with the same lines from his/her IRS form.
►Employment status: Employment reports are available to help simplify the verification process.
►Occupancy: Represented 16 percent of borrower misrepresentation according to recent Fannie Mae loan review fraud findings, as compared to 19 percent in 2010. Additional information can be gathered through third-party sources and compiled into an occupancy and bankruptcy report.
►Property valuation: Represented 11 percent of borrower misrepresentation according to recent Fannie Mae loan review fraud findings, as compared to 14 percent in 2010. Mortgage professionals often tap into subject property reports to obtain additional insight regarding a property’s current owner, property characteristics, and prior sales or refinance history.
►Borrower authentication: There have been recent advances in technology to help reduce fraud in this area, such as e-signatures (and other verification services) that reduce paperwork and save lenders valuable time from the start. Identity investigation reports can also help identify potential risk factors.
“By identifying potential risks before loans are scheduled to close, QC tools deliver strong pull-thru rates, better pricing and enable lenders to proactively work with borrowers and offer input throughout the entire loan process.”
Strides made in reducing mortgage fraud
Although there has been a slight reduction in fraud misrepresentation in several of the previously mentioned key areas over the last year, undisclosed liabilities continue to rise. Such liabilities are one of the leading reasons mortgage fraud and many lender repurchase demands occur today.
According to an April 2012 report from the Financial Crimes Enforcement Network (FinCEN), 92,028 mortgage loan fraud reported suspicious activity reports (MLF SARs) were submitted last year—a 31 percent increase over the 70,472 submitted in 2010.
There is a silver lining, however—40 percent of the MLF SARs submitted by filers showed that suspicious activity and/or fraud found in the SAR was the main reason an applicant’s loan was declined. In other words, financial institutions are preventing mortgage fraud from happening in the first place. The FinCEN report shows a significant improvement in overall mortgage lending since the height of the housing crisis, which can be attributed to better QC monitoring from lenders who are able to identify potential fraud issues before they even occur. More of this report can be found by clicking here.
The challenge of increasing transparency and identifying borrower’s undisclosed liabilities is one that should be focused on by mortgage professionals when evaluating their current QC methods. Thanks to recent changes in mortgage policies and an uptick in the number of mortgage loan fraud reported suspicious activity reports (MLF SARs) that are filed, major improvements are being made in how fraud is detected and prevented.
Continuous monitoring tools that detect new borrower debt incurred during the “quiet period,” are taking the guesswork out of the process and empowering lenders to take action. The valuable information garnered from this type of monitoring will increase the ability to originate loans more efficiently, resulting in mortgage professionals singing the praises of a different, more positive, adage—knowledge is power.
Greg Holmes is national director of sales and marketing for Credit Plus Inc., a Salisbury, Md. provider of credit and mortgage information services since 1928. He can be reached at email@example.com.