Let's suppose for a moment you needed to buy groceries for your family, but were short on money. Then, by sheer luck, a friendly man approaches you with an envelope. Inside, he says, there's enough money to buy all the milk, eggs and produce your family needs for a week. Now suppose the supermarket is several blocks away, on foot. Before you start off, do you look in the envelope to see how much money you have to work with?
It may seem like a silly question, but I use it to illustrate what's happening with far too many lenders today. Except in this case, the walk to the supermarket is the mortgage origination and production process, and the envelope is the borrower's real income and identity. Sadly, some in our industry are waiting until days before closing—when they're one block away from the supermarket, so to speak—to look in that envelope. In fact, they go through nearly the entire process with little more than blind faith that the information presented from their borrowers are true representations of who they are and their ability to take on the obligations of the mortgage. And they do this in spite of the availability of third party income verification and fraud management solutions that would enable them to know very quickly and very early what and who they are working with. The result of this delay is that it creates bottlenecks that are not only frustrating and stressful for the lender's staff and third parties (especially if the closing schedule is thrown off course), but it can also injure one's reputation with its borrowers. Further, it can lead to legal and financial problems down the road.
If there was ever a need for the industry to change this habit, it is now. For several years, the mortgage industry has been losing the battle against fraud. The most recent FBI fraud report released in June indicates that mortgage fraud investigations grew by 71% last year, even as housing sales volume declined. Obviously the bar has already been raised for lenders to pre-screen borrowers. But with the promise of new regulations in the wake of the Dodd-Frank financial reform bill, that bar is going to get even higher in ways that we can only imagine. Almost certainly it will result in tighter guidelines to verify the income and identity of all borrowers. And almost certainly those guidelines will lead to legal wranglings and buyback demands for those who elected to go light on the prefunding due diligence on fraud and income verification.
This is not a call in favor of income verification in general, which I believe to be a no-brainer. We've known for years now that the bulk of mortgage fraud is created through borrower misrepresentation. This is about moving income verification and fraud management to the beginning of the origination process, or at least as early as is practical. There are a number of reasons why the industry should fully embrace this concept, permanently, and the sooner the better.
First of all, verifying income early gives lenders clarity about the deal. It eliminates last-minute surprises and relieves at least one source of stress in an inherently stressful transaction. More importantly, it saves the time of doing deals that won't work before putting too much time and effort into them. Running verification reports as early as possible also increases the chances of transactions closing on time or even ahead of time. We're all mindful that a lender's reputation is directly tied to how borrowers remember the experience. The relationship between a loan officer and the consumer could be a virtual love-fest for the first couple weeks, where there might be bonding over shared hobbies or the discussion of family vacation spots. But if it ends in a last minute, hair-yanking tumble of frayed nerves—because of bottlenecks that could have been avoided—it's the awful finish that will stick in the borrower's mind. Performing these simple checks also displays good faith and more attention to detail toward investors whose money is at ultimately at risk. We know that they look for ways to protect themselves through repurchases, and we can expect those safeguards to become more focused on early detection of problems such as fraudulent or suspect income claims.
Some may still think it's too much work to run 4506-T requests earlier in the loan process, or that it may be wasted energy if the deal falls through for other reasons. But this thinking ignores the fact that simple, inexpensive tools already exist for lenders to run income verification and fraud checks as early as they want to, and that it has never been faster or easier to do so. This means fully electronic 4506-T forms and electronic tax transcripts from the Internal Revenue Service, and identity verifications through direct electronic interface with the Social Security Administration, available through online ordering and order tracking and document storage and archiving.
But whatever the means being used, all lenders should take a minute to "look inside the envelope" before getting too deep into the loan transaction. In the end, it saves time and makes everyone's life a bit easier.
Michael Chon is the co-president of income verification and fraud management vendor Veri-tax LLC.
