Spring is a great time of year to rekindle hope for things gone astray.
On a recent trip to Dallas, the sun was shining and signs of springtime were beginning to show. In the airport, I passed a very animated gentleman having a difficult conversation that I could not help but overhear.
The statements he was making were no less surprising than the change in the weather. He said, “You have got to start doing things right. There is no longer time for doing things wrong; there are consequences which are not acceptable.”
Now, I realize his conversation could have been about anything. But with our industry having just weathered its own “Winter of Discontent,” I imagine his comments could well apply in any loan origination shop across the country.
The man’s warning that there is no longer time for doing things wrong reminded me of times during the loan application process when originators do not scrutinize additional obligations prior to approval. In some cases originators themselves submit applications for two or more properties at the same time, and those multiple inquires are dismissed as rate shopping.
My colleague, Jim Ronan who is vice president of business relations at Interthinx, recently shared with me some statistics that show undisclosed obligations are the No. 1 reason for repurchases.
The resulting defaults will continue to be a problem if the industry continues to originate loans containing undisclosed obligations, which skew the debt-to-income ratios and drive the repurchase rates. Needless to say, the reputational damage inflicted by abnormally high repurchase rates and degraded securities is a major concern. We need to do things right!
What can be done? Lenders must be proactive, disclosing the terms and conditions of approval, and revoking those approvals where it has been determined that additional obligations have been shadowing the loan in process. The closing instructions provide ample notice of the consequences of loans closed in a defective manner. The will to apply these consequences must be fostered and encouraged.
Holding the originator to higher standards for credit inquiries, probing the borrower’s intentions through direct contact, and following up on outstanding items that just don’t make sense is the only way the lender can be sure that a loan will not be plagued by hidden obligations that balloon the debt-to-income ratios to levels which are unsustainable for the borrower. The will to push back when a borrower complains about the additional levels of scrutiny must be exercised, as it is in everyone’s best interest to keep all the parties honest.
We are reminded that fraud will always take the path of least resistance. If word on the street is that a particular lender will not tolerate these practices, the bad actors have to move on down the road, perhaps to find others willing to assume the risk posed by doing things the wrong way. Suffice to say, they will not be in business long as recent events have illustrated.
The will to exercise more scrutiny and use appropriate tools can empower lenders to prevent or minimize the potential for repurchases due to undisclosed obligations. By far, the best weapons at the lender’s disposal are automated fraud prevention tools that are “always on” and monitor the quiet period between the original credit file pull and the closing date for the loan.
Such tools can also be run by loan aggregators after the loan moves from originator to servicer. This enables the lender to identify if the borrower made application for additional debts, and will provide that much needed layer of resistance which will discourage and defeat the attempt to defraud in this manner.
As we move into April, if we do things right, we can be assured that our springtime remains hopeful and soon our winter of discontent will be a bad memory.
Matt Merlone is the director of investigations at Interthinx.
