Even a seemingly good thing in mortgage lending is not something one casually jumps into. If the water looks clean and shows no sign of risk, a good risk manager will spend a lot of time investigating to see if there are alligators in the water. This means walking around the pond many times, carefully checking everything within a mile of the pond and even sending up a drone for a bird’s-eye view for signs of future risk. Of course, the full detailed report of all of the findings needs to be submitted to senior management and the board. Then, after several meetings and months of deliberation, a decision can be made to move forward on a new way of doing business that was an obvious benefit from the start.
This level of risk analysis is not uncommon. The risk assessment conducted by companies can run the gamut from paranoia that puts a freeze on productivity to a complete lack of real investigation and jumping into the pond with alligators waiting.
Fannie Mae’s Day 1 Certainty is no exception to this process; it is an attractive and clear pool of opportunity. The opportunity is significant, and the barrier to entry is low if the company is already approved and in good standing with the agency. Yet, every credit risk and technology manager walks carefully through the requirements. They need to ensure nothing is missed that may void the relief gained from income and employment representations and warranties (reps and warrants). There must be an analysis of what happens when mistakes are made (not “if” mistakes are made). The opportunity is not as risk-free as it seems. Risk officers need to identify all of the possible mistakes and train as much as possible to protect against them.
Complex back to basics
Many mistakes in the loan manufacturing process result from a lack of knowledge. And not surprisingly, it is a lack of knowledge of the basics. It’s college bowl game season at the time of this writing – and there is good discussion about how the teams spend this extra time to prepare. The coaches talk about balance among training, development, understanding the opponent and rest. The back-to-basics training focus for the freshmen is key to most coaching plans, but only a few will put the seniors through the same basic training. There are several good lessons here that apply to implementing any risk-based process.
Back-to-basics training is a necessary step in building a solid foundation for dealing with any agency’s reps and warrants relief program (because Freddie Mac isn’t too far behind). Back-to-basics training should provide knowledge of income and employment documentation and calculations requirements for a wide range of scenarios. This means teaching originators, processors and underwriters how to apply fundamental concepts to a complex set of circumstances.
The right customized education will allow a lender to leverage the full benefit of relief from reps and warrants by embedding sound practices on the front line. There is every reason now to achieve mistake-proof income and asset calculation, as well as the complete documentation.
Procedure pivot points
After reducing human error, the next risk to mitigate is the constant consideration of exceptions and decisions in grey areas. Risk managers live to reduce grey areas. The brighter the lines, the easier it is for people to see and understand the boundaries.
When an automated underwriting system (AUS) issues the golden ticket message on the AUS report, indicating that the reps and warrants relief will apply, what comes next? The company will need to properly track the differences in loan handling, from loan delivery to post-closing quality control (QC). Many lenders are investigating the possibility of different treatment in accounting.
What if the AUS doesn’t issue the relief message as a direct result of how the income was entered?
The three-year continuance rule that applies to certain income types with a defined expiration date is a good example. There are specific types of income that require three years of payments remaining before it can be used in qualifying. Generally, this requirement applies when there is a contract or agreement in place providing regular monthly payments to the borrower, and the agreement is not ongoing. The AUS income and employment verification process won’t be able to detect whether this requirement is met. Waiver of the reps and warrants is not likely in this case due to the source of the income. However, other types of income also received by the borrower may qualify.
Should the contract income be removed and then the AUS be rerun to identify whether the remaining income types are enough to receive approval and relief? What if an adjustment in product type or loan amount adds reps and warrants relief? These questions and others related to assets, as the asset verification relief becomes available, need to be reviewed to define policies and procedures. The lender will need to make clear statements and put the customer’s best interests above the benefit of protection from repurchase.
AUS users are testers. Many are unaware that imaginary “what if” scenarios entered into the system can be considered misrepresentation, but it is common practice to try various loan scenarios to see what works and what doesn’t. In the case of reps and warrants relief, it is unlikely the origination functions will become focused on trying to achieve this message on their own. Sales and operations associates have little to gain with this new feature. Any message stressing the importance of getting reps and warrants protection, as often as possible, must come from the top. Once the lender commits to AUS reps and warrants waiver opportunities, the core values must remain. Customers continue to be the focus, and all managers must understand that nothing changes with the customers. Fair lending is first. Before rollout, the policies and procedures need to clearly address that the benefit of gaining this protection cannot be the sole reason that triggers a counteroffer to a customer.
Giving team members the right procedures to apply this rule in multiple and complex scenarios will not only protect against errors, but also ensure compliance.
Is the borrower OK?
The traditional borrower authorization letter is not enough to grant permission to a third party to go directly to the employer, IRS, or in the future, bank or stockbroker. The new conversation needs to be in bold letters, whether face-to-face or online, and clearly request permission to have a third party receive passwords and IDs to gain access to the account information. Customer acceptance of this will come when that message is clear and he or she has confidence that the information will be secure. This demands including good service messages in the originator’s script, as well as online, to ensure a simple step doesn’t cause a roadblock.
QC made simple
A simple benefit to consider in the AUS reps and warrants relief agreement is the reduced reverification requirement in post-closing QC reviews. When the system has confirmed income and employment, and the lender has used the correct income and provided the correct documentation, there is no need to verify income or employment again if the loan is selected for QC.
Most software systems will have the ability to track this loan category and identify if time and money can be saved in QC. Not only is reverification time saved, but review time is also saved. The complete process can be solved pre-closing and with the right statistical data and expertise, shortening the post-QC process.
There will still be lenders that want to verify everything anyway. But, this should only be at the start, until the proof starts to be seen that training, policies and procedures are working.
Technology putting on the brakes
Risk assessment is not only the credit and operations steps, but also the risk that systems don’t line up to produce an effective result. Many lenders can’t move forward because their service providers aren’t integrated with the AUS for this function yet. Integrators are lining up to be a part of the auto verification process. Choices will continue to expand as both agencies look to obtain information directly from the source.
No lifeguard on duty
The same people running the AUS today will be the ones the lender relies upon to gain relief from repurchases. It is up to the lender to review the comprehensive information published about freedom from reps and warrants and address all necessary procedure modifications related to the change. This is not just a new message on an AUS report – it is tangible financial security in mortgage loan origination. With the right preparation, there won’t be any alligators in the water.
Alice Alvey is senior vice president at Indecomm, leading the Indecomm-Mortgage U, internal quality assurance, compliance and software-as-a-service divisions. Prior to joining Indecomm, she was president and co-founder of Mortgage U Inc., a mortgage training and consulting firm. She can be reached at email@example.com.