Best Practices for Mortgage Lenders to Enhance Targeted Acquisition Strategies

While lenders are looking at more targeted acquisition strategies to fill their loan pipelines as origination volumes decline, more stringent standards for lending should be taken into consideration. The Dodd-Frank Mortgage Reform rules set forth by the Consumer Financial Protection Bureau (CFPB) implements ability to repay (ATR) guidelines for mortgage lenders. For loans that will be sold into the secondary market, Qualified Mortgage standards must be met. The QM rule presents more strict underwriting standards and limits features and points and fees for QM loans. Understanding all the new rules will help you improve compliance and close loans in a more timely fashion.

Underwriting factors

Every lender must establish its policy for determining an applicant's ability to repay. Eight factors must be considered in establishing ATR. An applicant's ability to repay must consider current or expected income or assets other than the value of the property, employment status, monthly mortgage payment and any simultaneous loans, as well as monthly payment for property taxes and insurance and other costs, such as homeowner's association dues. In addition, all debts, alimony, separate maintenance, and child support must be taken into account, as does credit history and the applicant's monthly debt-to-income ratio or residual income. With all of these considerations, it is crucial that you perform due diligence. You must leverage data beyond the traditional borrower credit. You should strive to obtain employment, income and asset documentation from direct sources in order to ensure they have an accurate value early on in the process.

Limitation

The QM rule incorporates not only the ATR standards, but prohibits loan features such as loans with negative amortization, interest-only or balloon payments, terms greater than 30 years or points and consumer fees of more than 3 percent of the loan value for loans exceeding $100,000 (different limits apply to other loan amounts). In addition, mortgage lenders must qualify borrowers at the fully indexed rate, income and assets must be verified and debt-to-income (DTI) cannot exceed 43 percent. There are some exceptions for lenders that meet the small creditor definition and those lending in designated rural areas of the country.

Improving the experience

There are steps that you can take to improve the mortgage origination process. For example, improved visibility into a borrower's credit activity can help you avoid last minute "fire drills" just before closing. Also, verifying income, assets and employment directly from the source disburdens the borrower. Another way to improve the customer experience is to reduce the number of days to close. Most regional banks now take 40 or more days to close the average loan. Even a small reduction in closing time, say to a 30-day average, can provide you with more business. Redesigning the loan process and streamlining operations will also contribute to an improved borrower experience. Remember, though, that there is a delicate balance between operationalizing regulatory requirements and gaining efficiencies in this area.

Protection against costly repurchases

Even as you are seeking to automate and streamline the application process, you must always take steps to protect yourself. Always weigh the demands for consistency and compliance against those for good customer service. According to Fannie Mae, undisclosed debt and income misrepresentation are the two biggest problems resulting in a repurchase. An increase of just 3 percent in DTI during a quiet period can derail an origination and cause loan repurchase demand. If additional debt is acquired during the pre-funding phase, the risk of repurchase and unsalable loans increases.

Best practices indicate that verifying employment and income directly with the source early in the process is the best defense. This tactic will help you manage costs and mitigate risk. In an Equifax study of 105,000 mortgage applicants, 15 percent took on new debt during the origination process, and 40 percent of those increased their debt-to-income ratio by 3 percent or more. In another study, 20 percent of applicants had undisclosed debt and 8 percent of those increased their DTI by more than 3 percent.

A close review of credit inquires and a discussion about any additional lending activity an applicant may be seeking is important to the process. These best practices can help you enhance the borrower experience while identifying those borrowers who are most likely to qualify for new, stricter underwriting standards.