In a world where “time is money,” and lenders have much to lose when income and asset verification go wrong, automated verifications are the only viable solution.
By Brent Chandler
In a world where the adage “time is money” has become a law of nature, it’s little wonder that most technological innovations are created for the sake of speed. Doing more in less time has certainly driven most industry innovation, and the results have been nothing short of revolutionary. Automated loan approvals, automated underwriting, and automated marketing tools—these are just several technological achievements that have sped up the business of selling loans that did not even exist a quarter-century ago.
Thanks to the 2008 housing crisis, lenders have recently focused more heavily on applying automation to the process of qualifying borrowers and verifying borrower information. This focus has led to new industry milestones, including automated identity checks and tax transcript requests, as well as automated asset checks—including FormFree’s AccountChek™ service. These solutions have also been about speed. After all, faster borrower verifications mean faster loan approvals and ultimately faster closings.
Yet automation is not only about speed. It’s also about data—which, with the proper safeguards in place, make transactions safer and more transparent. When applied to the borrower verification process, automation can help lenders create competitive advantages, meet the rigors of tomorrow’s compliance challenges, and prevent fraud more effectively. Plus, it removes a major source of frustration for borrowers.
For these reasons, the adoption rate for automated verifications will soar over the next year—as well they should. In fact, lenders that do not streamline borrower approvals through technology may be lucky to make it past 2016 in one piece.
If you’ve been hesitant to adopt these new tools, here are the three biggest reasons you should reconsider.
1. Prevention Against Borrower Fraud
As types of fraud go, mortgage borrower fraud is one of the most prevalent. According to recent statistics from Fannie Mae, 20 percent or more of mortgage fraud involves false data about a borrower’s income and assets. Falsified bank statements remain one of the most popular tools for this type of fraud. By some estimates, there are $13 billion worth of fraudulent loans originated each year. If Fannie Mae’s figures are accurate, lenders are losing $2.6 billion per year in assets and income fraud alone. Lenders that claim they’ve never seen falsified bank statements are most likely just not catching them.
This problem is only going to get worse, especially as the purchase market improves. That’s because so many lenders are still counting on paper bank statements to verify a borrower’s assets and income. Such manual processes are extraordinarily wasteful, in terms of not only time but also resources. It can take days or weeks to collect and review a borrower’s information and even longer if this information needs to be verified again before closing. But the real value in automating the verification process is that lenders can practically eliminate fraud, which costs them much, much more.
Today’s technology allows lenders to gather bank statement data securely, directly from as many different institutions as a borrower uses—and does so in minutes. Furthermore, because all the information is in digital format, it can be easily assembled into a comprehensive report that gives the lender a bird’s-eye view of a borrower’s finances and identifies the borrower’s problem areas. Such tools also reveal each borrower’s complete asset and income situation, which paves the way for a clearer mortgage decision-making process. And by eliminating all paper, automation removes a significant fraud loophole from the transaction.
2. Complying with Ability to Pay Rules
Some in our industry continue to argue that borrower fraud is not a lender’s fault—in such cases, lenders are merely victims. Try telling that to the Consumer Financial Protection Bureau (CFPB)! Given the agency’s recent history, it is very unlikely lenders will catch many breaks with the “not-my-fault” argument when everyone knows they could have had stronger protections in place—like automated borrower verifications.
Keep in mind that enforcement was the CFPB’s primary focus in 2015, and it’s not likely to change. In fact, during 2014 and 2015, the agency’s enforcement penalties against lenders doubled. Under new federal ability to repay rules, the CFPB requires lenders to prove that each borrower has the ability to afford his or her mortgage. That’s not going to be easy for lenders who continue to piece together borrower verifications by hand, one piece of paper at a time. In fact, it’s impossible. In other words, lenders that don’t automate their borrower verification process are most likely going to face fines at some point—if not from the CFPB, then from some other agency or law enforcement body. It’s now simply too easy to verify borrowers’ finances to have any excuse not to do so.
By nature, automated verifications—whether they involve identity, income, or assets—consist of source data, which helps lenders truly understand a borrower’s complete financial picture. It also helps lenders cross-check source data dynamically to validate against other sources and the borrower’s own statements. Once again, a surging purchase market makes such tools even more essential, especially as lenders seek to achieve compliance on higher LTV loans. Lenders that do not go the extra mile to demonstrate that their customers can afford to make payments may eventually find out they actually cannot afford the payments. Likewise, the lender may not be able to afford staying in business.
Consider also the fact that the Federal Housing Administration, the CFPB, and the GSEs all recognize the value of residual income in determining a borrower’s ability to repay. Yet many borrowers have no clear way to document residual income—except by directly obtaining the source data from the borrower’s bank account. This is where asset verification technology comes in. It can instantly collect and identify all a borrower’s current debt obligations, such as alimony and child support, and instantly calculate the borrower’s residual income and apply it to the borrower’s debt-to-income ratio. If a borrower is using a lender without such tools, however, they might not qualify for a loan that they might actually be able to afford.
One more thought about fraud and compliance—as home prices continue to rebound and the purchase market heats up the way many expect it to, it’s also highly likely that unethical borrowers will target “easy” lenders that don’t have the safeguards of automated verifications in place. This puts lenders that choose to remain behind the curve at a double disadvantage—open to fraud and vulnerable to regulatory action.
3. Automation as a Competitive Necessity
Last year was a pivotal one for the mortgage industry in many ways. It saw the return of purchase loans and a transition toward a more wholesome housing market, which will continue this year. Yet as the purchase market grows and improves, a large segment of the industry is still relying on paper-based methods of verifying borrower data and asking borrowers themselves to submit proof of their own income and assets. The trouble is that this not only leaves lenders open to fraud, but also it makes it difficult to demonstrate regulatory compliance. From a competitive standpoint, it is also getting lenders killed.
In order to compete effectively in the face of growing regulation, all industry players have to adopt technologies that make them more efficient. In today’s highly regulated environment, using traditional manual processes to review and verify origination paperwork will inevitably result in a drop in volume. There literally aren’t enough hours in the workday for lenders to meet new loan review requirements while maintaining current production and staff levels.
For example, the traditional path of verifying a borrower’s qualifications involves asking borrowers to research, submit, and explain paper bank statements, tax returns, or any other large transfer of funds. Not only is this frustrating for borrowers and makes the mortgage transaction last much longer than it should, but also it pushes some borrowers to simply abandon the process. Some see it as too much work with no guarantee they will get the loan. Why go through all that hassle if they may not get approved? With automated verifications, this entire problem disappears.
Besides alleviating the frustrations of borrowers and saving lenders untold expense, automated verifications also speed up the loan approval process. Of course, automation has been speeding up loan approvals for a long time. Only now, automated verifications are grabbing authentic borrower data in real time so that the loan approvals are far more solid.
Suffice it to say that lenders that continue to ignore automation in the borrower verification process will be more likely to experience mortgage fraud, to incur the wrath of the CFPB and other regulatory agencies, and to lose sales to competing lenders that are better equipped. If you’re in that category, and you’re feeling a little nervous right now, you should be.
Dale Carnegie once wrote that “If you want to conquer fear, don’t sit home and think about it. Go out and get busy.” Every lender would do well to heed such advice. With today’s available technology, there is no reason not to. Automating the borrower verification process is less expensive than processing tax transcript requests by fax machine and documenting borrower assets by paper.
After all, time is valuable, and so is peace of mind. `