If you're in mortgage lending, you probably already know that undisclosed debt is the number one cause of mortgage fraud. Unfortunately, borrowers often take out new loans or make other significant changes to their debt situation within days of closing and that puts lenders in a precarious situation. Under the terms of the Fannie Mae Loan Quality Initiative, lenders are responsible for disclosing any new debt prior to closing, and to ensure you can meet that stipulation, you need to have a undisclosed debt monitoring process as part of your mortgage lending services solutions in place.
Fannie Mae's Loan Quality Initiative
To ensure quality, Fannie Mae regularly reviews mortgages at various stages in the life of the loan. If Fannie Mae discovers that a lender has breached the terms of the mortgage purchase condition, it can require the lender to repurchase the loan, make whole payments, or take alternate actions. Unfortunately, due to widespread issues, the company was forcing an unwieldy number of banks to buy back their loans, and to reverse that trend, the company put the Loan Quality Initiative in place.
Now lenders need to pay attention to the following elements:
The identity of the borrower
Information about the property and the appraisal
Reporting and validating mortgage insurance coverage data
Quality control requirements
Changes in financial circumstances
While most of these elements are straightforward for people in the mortgage industry to handle, undisclosed credit issues in the quiet period can create problems.
The Quiet Period
The quiet period is the part of the mortgage loan process between pulling the borrower's credit report and closing on the loan. Under the terms of the loan quality initiative, you don't have to pull a new credit report, but you need processes in place to find changes in your borrower's financial situations.
Undisclosed debt monitoring makes that possible. Ideally, you need tools in place that can monitor the following in real time:
New credit inquiries or applications
New tradelines or credit accounts opened
Reissues of existing accounts
New bankruptcies, judgments, liens, or collections accounts
Late payments or delinquencies
Armed with that information, you can move forward with the closing confidently, and if necessarily, you can require borrowers to requalify. In particular, if borrowers have taken out additional credit and their debt-to-income ratio changes by 3% or more, you are required to redo the underwriting process.
Protection for Borrowers
When you commit to undisclosed debt monitoring, you protect your financial institution, and you reduce inefficiencies in the process. Rather than pulling multiple credit reports or manually monitoring your clients' reports, you automate that process, saving yourself time. By increasing your commitment to compliance, you also boost the confidence levels of your investors and improve your ability to attract quality underwriters. Most importantly, you don't have to worry about the risk of buy backs or deal with the financial blow to your lending institution.
To learn more about undisclosed debt monitoring, you need Data Facts. We have been providing mortgage lenders with essential services since 1989.
For information you can trust and help with compliance, contact us today.