The rules of the game are changing on Jan. 10, 2014. Thatís the date the ability-to-repay rule takes effect. Designed to prevent people from getting mortgages they canít afford, ability-to-repay requires lenders to verify that borrowers have the financial means to repay both principal and interest on a new mortgage for the long term, beyond any special introductory rate.
The Consumer Financial Protection Bureau set eight underwriting criteria that must be considered in determining ability to repay:†
- Current employment status
- Current income and assets
- Credit history
- Monthly payment for the desired mortgage
- Monthly payments for any other loans associated with the property
- Monthly payments for other mortgage-related obligations, such as property taxes
- Other debt obligations
- Monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage
While the goal of these new underwriting requirements is definitely worthy and some lenders have already taken steps to make sure these verifications are in place, it takes a great deal of employee dedication to gather the necessary information and ensure it is correct. Some of the needed data can be found on credit reports, but other information, such as employment status, takes more effort to verify and, therefore, can be time-consuming and costly.
For the many lenders who have downsized due to the drop in refinancing applications and foreclosures, this could create a greater problem. A recent report from Challenger, Gray & Christmas, the nationís oldest outplacement consulting firm, reported 6,932 layoffs in the financial sector last month, for a total of 48,874 in 2013. While lean workforces keep personnel costs down, they often donít allow much flexibility when tasks like employment verifications demand more and more time each day.
Lenders typically verify employment twiceĖfirst when the application is taken, and again within 10 days of closing. Lenders may find some companies are not very cooperative about taking or returning calls. They may find their staff spending inordinate amounts of time in a frustrating cycle of making follow-up calls without ever receiving a response. Some verification efforts that go on too long may even end up falling between the cracks.
So whatís a responsible lender to do to ensure it is in compliance? One solution is to outsource employment verifications through a program like The Work Number, a solution offered through Equifax Workforce Solutions. The Work Number is the largest collection of payroll records contributed directly from employers. Its massive database contains 55 million employees and it receives input from more than 2,500 employers in the United States. Information is updated every payroll cycle to ensure it is as reliable as possible.
(Editorís Note: Credit Plus is a certified reseller of The Work Number.)
Our customers report that outsourcing employment verifications has been beneficial on several fronts: verification has become much easier, the information is reliable, the fixed cost per verification simplifies budgeting, and office productivity has risen because staff isnít spending time making repeated calls to employers. In this slowly improving economy, with leaner staffs and new requirements going into effect, lenders may find that outsourcing some tasks, like employment verifications, may open up the time their workforce needs to maximize its efforts on more pressing matters.
Greg Holmes is national director of sales and marketing at Credit Plus Inc., Salisbury, Md. Credit Plus is a provider of credit and mortgage information services. He can be reached at firstname.lastname@example.org.