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Riding the Verification Waves in a QM and Non-QM Sea

The following is a print feature that appeared in MReport's September 2014 issue.

The subprime meltdown was like a waterspout on the ocean—breaking masts and sending ships crashing onto the rocks. When the winds finally settled, changes were instituted to protect consumers who ventured into mortgage waters and also to protect communities from housing bubbles that burst and could lead to waves of foreclosures. Furthermore, these changes were to ensure that a storm of that magnitude would never happen again.

Those changes included many new types of proactive safety regulations that, in a sense, required mortgage professionals to have a lifeboat on board, wear a lifejacket, and regularly verify their compass direction before steering a mortgage ship. As it happens, those are smart choices to make, whether you're heading across the Atlantic or floating out on the great mortgage sea.

The Trade Winds of Change

Change has been blowing across the industry ever since the mortgage meltdown. On those winds has come a renewed emphasis on verification to ensure not only that borrowers can repay the loans they receive, but also that lenders originate safer and more affordable loans:

» Fannie Mae's Loan Quality Initiative (LQI) was created to help ensure loans meet the credit and eligibility standards, pricing guidelines, and other new requirements of the Selling Guide or negotiated variances. The LQI is Fannie's long-term investment in systems, processes, and controls to help ensure that loans have undergone a careful risk assessment and are originated using accurate data. LQI focuses on gathering critical loan data earlier in the process and validating it all along the way. Such data includes:

  • Borrower Identity Verification
  • SSN and ITIM Verification
  • Borrower Occupancy
  • Validation of Qualified Parties
  • Undisclosed Liabilities
  • Minimum Credit Score
  • Property Unit Number
  • Calculating Loan-to-Value Ratio
  • Manual Underwriting of DU Refer with Caution Loans

» Freddie Mac's Industry Letter on Quality Control and Enforcement Practices, and its publication on Quality Control Best Practices, spell out the requirements for establishing, managing, and documenting an effective in-house quality control program.

» The Dodd-Frank Wall Street Reform and Consumer Protection Act increases requirements for investors to monitor loan quality throughout the origination process. This regulatory oversight caused organizations to carefully examine internal auditing and outsourcing strategies.

» The ability-to-repay rule requires that creditors use reasonably reliable third-party records to verify that the consumer will be able to repay the loan. Third-party records are defined as:

  • A document or other record prepared or reviewed by a person other than the consumer, the creditor, any mortgage broker, as defined in § 1026.36(a)(2), or any agent of the creditor or mortgage broker;
  • A copy of a tax return filed with the Internal Revenue Service or a state taxing authority;
  • A record the creditor maintains for an account of the consumer held by the creditor; or
  • If the consumer is an employee of the creditor or the mortgage broker, a document or other record regarding the consumer's employment status or income.

» Using those third-party records for verification, the creditor must consider eight underwriting factors when deciding whether to grant the loan:

  • Current or reasonably expected income or assets
  • Current employment status
  • Monthly payment on the covered transaction •Monthly payment on any simultaneous loan
  • Monthly payment for mortgage-related obligations
  • Current debt obligations, alimony, and child support
  • Monthly debt-to-income ratio or residual income
  • Credit history

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