February 2016 - The Industry's Best Kept Secret

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28 | TH E M R EP O RT FEATURE they could have had stronger protections in place—like auto- mated borrower verifications. Keep in mind that enforce- ment 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 verifica - tions by hand, one piece of paper at a time. In fact, it's impossible. In other words, lenders that don't automate their borrower verifica- tion 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 verifi - cations—whether they involve identity, income, or assets—consist of source data, which helps lenders truly understand a borrower's com- plete financial picture. It also helps lenders cross-check source data dy- namically 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 compli - ance 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 actu- ally 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 recog - nize 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 col - lect 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 pur - chase 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 L ast 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 hous- ing 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 meth - ods 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 lend - ers 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 regulat - ed environment, using traditional manual processes to review and verify origination paperwork will inevitably result in a drop in vol - ume. There literally aren't enough hours in the workday for lenders to meet new loan review require- ments while maintaining current production and staff levels. For example, the traditional path of verifying a borrower's qualifica- tions involves asking borrowers to research, submit, and explain paper bank statements, tax returns, or any other large transfer of funds. Not only is this frustrat - ing 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 frustra - tions 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 automa - tion in the borrower verification process will be more likely to ex- perience 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 tech - nology, there is no reason not to. Automating the borrower verifica- tion 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. BRENT CHANDLER is the founder and CEO of FormFree Holdings Corporation. He can be reached at 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.

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