Technology gave us better lives, moving us from the horse and buggy to the freeway. Now, like the rest of the world, technology is fundamentally altering the work processes in mortgage banking. The industry is in the process of taking a technological leap in an especially difficult area, income calculations.
Income calculations have always been a contentious part of the loan cycle. They affect all the agents in the process. Borrowers are not used to calculating their income according to mortgage guidelines. Loan originators and processors may not be as skilled at income calculations as underwriters, but are increasingly required to function like an underwriter.
Underwriters themselves can make mistakes due to simple human error or missing guideline updates. In addition, the no-income-verification loan programs that once allowed lenders to skip challenges like self-employed borrower calculations have primarily disappeared from the marketplace. With fair lending and Ability-To-Repay regulations and a decreased appetite for risk, every borrower must prove their income.
Despite the ever-increasing pressures in this area, most lenders still approach income by leaving it up to the underwriter to pull everything together. If technology can improve processes in so many areas of mortgage banking, why can’t it add efficiency to one of the most traditional aspects of the loan process, income calculation?
Calculating income for a mortgage is not just a set of mathematical equations. It requires application of rules, risk assessment and flexibility. It also requires security and audit trails. These factors make up the science of income analysis. Solving the mathematical equations alone doesn’t provide the science needed to ensure a saleable and compliant loan. Good science takes into consideration the challenges found throughout the loan process and lending environment.
CHANGING GUIDELINES ARE THE NORM
Today’s endless change-management cycle of email blasts, team meetings, training sessions and worksheet updates is exhausting and cumbersome at best. At its worst, many, despite the multiple avenues of distributing this information, undoubtedly still fail to receive, understand or, perhaps most likely, remember the recent changes. With guidelines serving as the backbone to every facet of the mortgage process and, in particular, the keys to calculating income, a better method of distributing information is desperately needed.
Many lenders have recognized that a centralized location for these guidelines is crucial, and an entire industry has been created to collect and publish the basic rules. But even this doesn’t get the guidelines in the right place at the right time. Lenders must develop a reliable method to distribute recent changes to their firms as the rules change and ensure the team adopts those changes as a habit.
REGULATORY RISK IS HERE TO STAY
New varieties of regulatory risk continue to find their way into the income calculation process. Qualified Mortgages, safe harbor, disparate impact lawsuits and ATR documentation have drastically raised the bar for lenders in the area of compliance. What lender can guarantee that every underwriter will calculate income the same way, given the same scenario?
This message has not been lost on the industry. Many lenders have developed comprehensive worksheets and devoted extensive time to the upkeep of these worksheets. But no two are exactly the same. Over and above developing and maintaining these worksheets, associates, vendors and clients must be trained on the unique use of each version.
Even with worksheets and precautions, the calculations employed — particularly for borrowers with complex income — are often different for each professional who touches the loan file. These differing calculations place undue risk on a lender and also create havoc for both the underwriting and quality assurance teams.
PHYSICAL SECURITY
Most offices are now filled with surveillance cameras, electronic entry points and recording devices. These tools are provided to physically protect information. The importance of physical security cannot be underestimated, but the same diligence must be applied to each aspect of the loan-manufacturing process.
Unfortunately, despite its importance, spreadsheets and the LOS do not provide the same kind of audit trails for the actual loan files. While many loan origination systems (LOS) document activities such as notes and logs, income calculation is all too often completed outside the confines of the LOS.
Even within tools or modules hosted within an LOS, the thought process behind why certain decisions had been made is often missing. Re-creating decisions that were made weeks, months, or even years before can be cumbersome for the most advanced forensic underwriter, let alone a front-line underwriter who has approved hundreds, if not thousands, of loans in the time between a loan decision and a repurchase demand.
AUDITS ON THE AUDITS
In response to the increasing risks and additional regulations, lenders are adding audits and, audits of the audit. The additional focus on quality assurance reduces the concerns of many stakeholders. However, these processes are long and often expensive.
Instead of focusing on the work to be done in double and triplicate, most would agree that the best approach would include accuracy the first time around. The best prospect of achieving accuracy with one fell swoop is to use a combination of skilled underwriters supported by new technology.
In addition to a good combination of resources, the technology should also be customizable to adapt to different audit types. This should include everything from comprehensive reviews to targeted sampling of income in processes from retail through correspondent and warehouse lending.
THE PERFECT STORM
All of the current challenges have combined to create the perfect storm. With increasing responsibilities being shifted to underwriters in an effort to promote loan quality, productivity is crawling to a halt at many lenders. This reduction is causing backlogged pipelines and frustration among all the stakeholders.
Lenders have historically embraced the tools of the day to enhance their processes. While those tools used to be bulky file folders and a drawer of highlighters, intelligent options are providing the crucial technology and science needed to improve income calculation processes.
Automated underwriting engines received criticism over the years for taking decision making away from staff with years of experience. But most underwriters no longer expect the decision on a loan to be made entirely by a Loan Prospector or a Desktop Underwriter.
Instead, underwriters view these engines as valuable, serving as one of the most critical tools available to aid in the loan-decision process.
With these tools as an aid and a safety net in the loan decision, most in the mortgage industry would now agree that, as employees, they are more productive and precise when using the assistance of an automated underwriting engine.
The time has come for new tools with capabilities extending beyond the assistance provided by automated underwriting systems (AUS) to fill the largest gap in the AUS decision. Intelligent tools for income calculations are the next frontier. They represent a smarter and better way to maximize consistency and efficiency, as long as the system has all the right science built into it.
While the need for training and communication around recent changes cannot be minimized, management can rest easier knowing that staff will have a safety net that captures recent changes.
THE BENEFITS
Mandating the use of an intelligent tool for income calculation can enhance existing requirements in verifying that each associate calculates income in a cohesive and consistent manner. Imagine the power behind offering a tool for consistent income calculation to each member of your workforce: your originators, processors, underwriters and quality analysts.
More loans can be closed with a shorter cycle time if income is calculated accurately, with the right documentation and analysis, at the point of application. Training for new associates can be quicker and more fruitful with a rules-based system that will guide them in missing documents and red flags.
Underwriting productivity, the pain point in pipelines throughout the country, can increase with files that are submitted with both properly documented and properly calculated income.
Envisioning a brand-new way to approach the most staid, but fluid, portion of the loan file can be a daunting proposition. In our industry’s sea of technology offerings, a truly intelligent approach to one of the most risk-filled aspects of the loan process is long overdue.
Creative solutions are arriving that offer this very value proposition. After spending years with calculator tapes, updating and printing worksheets with every touch, and defending decisions to originators and quality control alike, even change-adverse underwriters are open to a more sophisticated approach.
And after years of maintaining those worksheets, training staff, and defending their team’s decisions to investors, management and other stakeholders, lenders find themselves open to a new way as well. Here’s to the future and an exciting new and scientific world of income calculations.
