Fannie Mae LQI and CFPB Compliance: Detecting Undisclosed Liabilities

offered by Credit Plus

Undisclosed Debt

What is Undisclosed Debt?A new debt added by the consumer after the original credit report was

pulled that was not taken into consideration in the underwriting decision of the loan.

Why is it important to disclose all debts?Protect yourself against repurchase.Agency requirement.

– Fannie Mae requires the lender to document any new undiscovered liabilities up to and concurrent with the loan closing.

CFPB caps DTI at 43% New FHFA Rep and Warrants Framework.

LQI: Investor Requirements

Loan Quality Initiative (LQI) FAQs May 28, 2010

These FAQs provide additional information related to Lender Letter LL-2010-03, An Introduction to Fannie Mae’s Loan Quality Initiative, Announcements SEL-2010-01, SEL-2010-03, and SEL-2010-11, and EarlyCheck™. For other resources, visit the Loan Quality Initiative page on eFannieMae.com. Also refer to the Uniform Mortgage Data Program information, including FAQs, on eFannieMae.com.

~Q4. How would a lender confirm that undisclosed liabilities are not present in a transaction, through the closing of a transaction? The lender is responsible for implementing practices to identify undisclosed liabilities in a transaction. It is the lender’s responsibility to develop and implement its own business processes to support compliance with Fannie Mae’s requirements on loans delivered to us. Although many lenders already have such processes in place, Fannie Mae provides lender tips on eFannieMae.com regarding practices that may provide insight as to the presence of undisclosed liabilities. Some examples include:

New vendor services are becoming available to provide borrower credit report monitoring services between the time of loan application and closing – Equifax’s Undisclosed Debt Monitoring™ is one example. (Note that Fannie Mae does not endorse specific vendor services; and lenders must make their own decisions about how to meet our requirements for loans delivered to us).

Effective date: June 1, 2010

(Note: To view FULL Announcement, visit: www.fanniemae.com)

Effective date: Dec. 1, 2010

“New vendor services are becoming available to provide borrower credit report monitoring services between the time of loan application and closing – Equifax’s Undisclosed Debt Monitoring™ is one example.” (Note that Fannie Mae does not endorse specific vendor services; and lenders must make their own decisions about how to meet our requirements for loans delivered to us).

Fannie Mae's #1 Focus/Issue

The “1003 boxes” that should be the focus of every Lender’s U/W and QC program

Fraud Prevention Efforts – Risk & Reward

The new model moves the focus of quality control The new model moves the focus of quality control reviews from the time a loan defaults up to the time reviews from the time a loan defaults up to the time the loan is delivered to Fannie Mae or Freddie Mac. the loan is delivered to Fannie Mae or Freddie Mac.

Lenders will be relieved of certain repurchase Lenders will be relieved of certain repurchase obligations for loans that meet specific payment obligations for loans that meet specific payment requirements, for example, rep and warranty relief will requirements, for example, rep and warranty relief will be provided for loans with 36-months of consecutive, be provided for loans with 36-months of consecutive, on-time payments; on-time payments;

• Conduct quality control reviews earlier in the loan Conduct quality control reviews earlier in the loan process, (30 to 120 days after loan purchase); process, (30 to 120 days after loan purchase);

• Establish consistent timelines for lenders to Establish consistent timelines for lenders to submit requested loan files for review; submit requested loan files for review;

• Evaluate loan files on a more comprehensive Evaluate loan files on a more comprehensive basis to ensure a focus on identifying significant basis to ensure a focus on identifying significant deficiencies; deficiencies;

• Leverage data from the tools currently used by Leverage data from the tools currently used by Fannie Mae and Freddie Mac to enable earlier Fannie Mae and Freddie Mac to enable earlier identification of potentially defective loansidentification of potentially defective loans

Washington, DC – The Federal Housing Finance Agency Washington, DC – The Federal Housing Finance Agency (FHFA) today announced that Fannie Mae and Freddie Mac (FHFA) today announced that Fannie Mae and Freddie Mac are launching a new representation and warranty (rep and are launching a new representation and warranty (rep and warranty) framework for conventional loans sold or delivered warranty) framework for conventional loans sold or delivered on or after Jan. 1, 2013. on or after Jan. 1, 2013.

Fannie Mae’s updated post purchase review process:

Supporting new rep and warrant. framework.

Definitions and examples of defects.Fannie defines a defect as an area of non-compliance with underwriting or eligibility requirements outlined in the Fannie Selling Guide or an individual lender’s negotiated contract terms.

Four focal points of the audit process:•Collateral Defect•Occupancy Defect•Income & Liabilities – Excessive DTI Defect

• DTI exceeds maximum due to undisclosed liability or simultaneous second lien.

•Credit Defect

The top five types of occurring new tradelines:•Represent 759 (or 79.48%) of all new tradelines•Carries an average payment of $281.60•Requires a minimum of $9,386.67 net income to absorb new payment and remain less 3% change in DTI•Represent potential repurchase risk of $32,231, 998*

Actual Case Study of Pipeline Risk

Top 5 New Trade Top 5 New Trade Line Occurrences Line Occurrences represent:represent:

• 76.0% of ALL new trade lines,

• carries an average new payment of $278,

• requires $9,261 total income to absorb new payment without exceeding 3% net change in DTI,

• a total of $32,414,145* Potential Repurchase exposure.

* based on 20 % of loan amount.

UDM – Case Study

Benefits of UDM vs. ‘Refresh Report’

77.8% 22.2%

Refresh Report

Underwriting

Origination / processing Conditions / Payoffs

C-T-C / Docs

4,800 loans from the UDM database were reviewed for this sample during June 2012.4,800 loans from the UDM database were reviewed for this sample during June 2012.Over 1,100 new trades were captured from 956 loans during the monitoring period for this sample Over 1,100 new trades were captured from 956 loans during the monitoring period for this sample

and 22% of those new trades were reported 10 days or less prior to closing.and 22% of those new trades were reported 10 days or less prior to closing.

A Closer Look at the ‘Gap’ Exposure

Breakdown of NEW Trades in the ‘Gap’

• Based on ALL trades from origination to close.

Had this customer been using a Refresh Report and pulling it 5 days prior to closing, they would Had this customer been using a Refresh Report and pulling it 5 days prior to closing, they would have missed 141 new trades. 20 of those new trades had a reported payment of over $400.00. have missed 141 new trades. 20 of those new trades had a reported payment of over $400.00.

Comparison on Credit Results

Number of Loans: 4,800 Gap Reports Ordered: 4,800 Loans Reviewed: 4,800 Percent of Trades Missed: 12%-30% depending on when the Gap report is ordered Note: Gap reports are credit reports and require DU to be rerun using last reported balances.

Note. FNMA Guide Chapter B3-6Note. FNMA Guide Chapter B3-6

The lender is not required to obtain a new credit report to verify additional debt(s). However if The lender is not required to obtain a new credit report to verify additional debt(s). However if the lender chooses to obtain a new credit report after the initial underwriting decision was made, the lender chooses to obtain a new credit report after the initial underwriting decision was made,

the loan must be re-underwritten.the loan must be re-underwritten.

Number of Loans: 4,800 Loans Monitored : 4,800Loans Reviewed: 956Percent of Trades Missed: 0%

Note: UDM is not a credit report simply a monitoring of the borrowers credit file.

Changes in DTI

Changes in DTI Based on Number of New Trade Lines per Borrower

*Based on an anonymous sample of 105,000 mortgage applicants.

Undisclosed Debt

What are you doing to protect yourself from Undisclosed Debts?Are you compliant with Agency Reps and Warrants?Have you ever had a loan delayed or not close due to a new debt discovered just before closing?Do you know if your borrower is shopping you?

Undisclosed Debt MonitoringTM

Launched

What it is/does:A proprietary platform that monitors the period of time from the original credit file pull to the

closing of the loan (sometimes called the “blind spot” or “quiet period”), providing daily alerts of potential risk associated with mortgage loans in the customer’s pipeline

The value it brings to the customer:Promptly communicate with borrowers regarding specific activities during the underwriting

process–Our platform is “always on”

Streamline underwriting and quality control (QC) efforts–Timely alerts of borrower activity helps prioritize manual underwriting reviews by focusing on applicants and transactions that represent the highest level of risk for repurchase

Improve the confidence level of investors, mortgage insurers and regulators Immediately improve the quality of new mortgage loan vintagesReduce the significant costs of repurchasing “broken loans” Reduce long-term exposure to repurchase loans that become delinquent or default

How Does Undisclosed Debt Monitoring Work?

May 1Initial credit

report ordered.

May 16Credit Plus delivers all new debts, credit

inquiries, and secondary use inquiries that appeared on the consumer’s Equifax credit

file from the initial credit report date to expiration.’ 1

May 21UDM Alert!

Credit Plus sends customer a monitoring

Alert with the new credit tradeline information.

May 31Customer saves

summary report of all activity delivered during the monitoring period in

the file for investor.

May 15Activation Date

Loan is preliminarily approved. Customer

orders UDM on Credit Plus Website.

May 20New credit tradeline is placed on consumers

Equifax credit file.

May 30Loan closes and funds triggering customer to Deactivate monitoring.

Why an “Always On” Monitoring System is the Answer:Streamline your underwriting and quality control efforts resulting in faster approval of your low-risk applicantsImmediately improve the quality of your new mortgage loan vintages resulting in higher confidence from your investors and mortgage insurers

1 Monitoring begins on a daily basis once the borrower information has been received by Equifax. The ability to provide a retro snapshot is possible and should be discussed with your Credit Plus representative to determine the optimal timing for your production process

Three Alert Types (Attributes):New Tradelines – all types

Date reportedFirm nameCredit LimitBalance Scheduled payment amountIndustry code

Inquiries – all consumer initiated Date reportedFirm name Industry code

Secondary re-issue inquiry – all mortgage CRAsDate reissued

You receive a daily file of errors/no-hits, alerts and/or summary

Origination Loan CloseYou receive a daily file of errors/no-hits, alerts and/or summary

What Activity is Monitored?

The Challenge – Identifying Risk in the Pipeline

Low-Risk:

•The majority of your pipeline is low-risk/good.•Close these loans fast and with more confidence.

Questionable:

•Identify these loans earlier in the process, focusing valuable underwriting resources on these borrowers who may require additional documentation.•Investigate, re-underwrite and proceed to closing with minimal disruption.

High-Risk:

•Confidently review borrower files when new activity appears, investigate and re-underwrite.•Fraud or unintended liability is identified and approval is no longer valid. STOP closing.

Deliberate or Unintended Act

Identified

Lender Pipeline

U/W Approval & Closing

1003

Get More Documentation

U/W Approval & Closing

Escalate the Review Process

Investigate/ Stop Closing

Pool of Consumers with Alerts

Unintended, but NEW Activity

Triggers Alert

No alerts

Origination

Closing

The

“Blin

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In addition to reducing risk, Undisclosed Debt Monitoring empowers Lenders to:1.) More efficiently underwrite new loans2.) Avoid last minute Customer Emergencies3.) Maintain strong pull-thru ratios and better pricing

UDM: Most Efficient LQI Solution

The Value of Active Monitoring

New Credit Report

Pre-CloseReport

Compare/GAPReport

ActiveMonitoring

Identify Undisclosed Liabilities

X X X X

All Origination Channels X X XProcess Efficiency XCost Effective X X X XImprove Customer Service XReporting & Tracking Capabilities

X

Undisclosed Debt Monitoring creates value for all of these stakeholders by providing Undisclosed Debt Monitoring creates value for all of these stakeholders by providing proactive status alerts and industry-leading analytics.proactive status alerts and industry-leading analytics.

Case Study

Case Study ROI

1.) Client Closes 2,000 Mortgage loans per month

2.) Average hourly cost of Underwriter is $60/hour @ 15 minutes on average per loan

3.) Client relies on referral business from realtors and/or wholesale partners

Pre-Close & Compare ReportsLabor: $15 / loan x 2,000 loans reviewed = $30,000

Cost of Report: $12 / report x 2,000 loans = $24,000

Fire Drills: (Morale, Customer Service, and Lost Future Business) = ‘Expensive’

Total Cost = $54,000 / month

x 12 months = $648,000 Annual cost

Undisclosed Debt MonitoringLabor: $15 / loan x 500 loans reviewed (est. 25%) = $7,500

Cost of UDM :$18 / loan monitored x 2,000 loans = $36,000

Fire Drills: (Reduced by a minimum of 75%) = ‘Priceless’

Total Cost = $43,500 / month

x 12 months = $522,000 Annual cost

Annual Savings = $126,000

Over 7 parties can be impacted when a Purchase Transaction fails:The Buyer

The Seller

The Realtor (Buyer’s Agent)

The Realtor #2 (Listing Agent)

The Loan Officer

The Title Closer (Buyer Representative)

The Title Closer (Seller Representative)

Mortgage Loan Officers = Relationships + No SurprisesMortgage Loan Officers = Relationships + No Surprises““It is all we have to differentiate in a purchase market” It is all we have to differentiate in a purchase market” – Fifth Third – Fifth Third

ExecutiveExecutive

The #1 Priority for Mortgage Originators starting in late 2012 and 2013 are purchase transactions

Your Reputation Is At Stake

Loan Officers Love This Tool

Trigger Lead Defense:Have you ever lost a loan to a trigger lead?

You invest time with your borrower getting them approved for the loan and suddenly another mortgage company is contacting them trying to offer better terms.

UDM alerts you of any other mortgage inquiries (could be a result due to triggers)

UDM also preserves your pipeline, by letting you know if your borrower is actively “shopping” your company against other mortgage companies.”

Industry Benefits

Improve Customer Service• Proactive versus reactive• Deal with findings when they occur versus waiting days prior to closing• Notify your clients more timely on issues

Improve Productivity

• Eliminate loans in your pipeline sooner to reduce processing costs• Eliminate bottlenecks, loan extensions and last minute problems prior to closing• Review less files and reduce personnel cost per loan

Improve Risk Management.• Fully meet Agency, Investor and Regulator LQI recommendations• Improve monitoring without any time gaps as you monitor through closing • Secondary Reissue alerts help lenders determine borrower shopping, undisclosed

mortgage loans and fraud

Alert Summary

Email Alert

Common Objection

UDM doesn’t report changes in balances-FNMA expects lenders to have in place processes to facilitate borrower disclosure of changes in financial circumstances throughout the origination process for discovering material undisclosed debts (new debts).-FNMA has simplified their requirements with Announcement SEL-2010-11. It expects the lender to resubmit for underwriting if: 1. The lender finds for discrepancies in balances or payments between original credit report and the original 1003 application. 2. Additional debts (new) are disclosed by the borrower or discovered by the lender if the resulting

new debts increase the DTI to over 45% or raises the DTI by more than 3%. .-NOTE: The lender is not required to obtain a new credit report to verify the additional debt(s). However, if the lender chooses to obtain a new credit report after the initial underwriting decision was made, the loan must be re-underwritten using 45% and 3% DTI requirement.-NOTE: Credit balances at closing cannot be audited post close with a review credit report. These post close credit reports will show new trade lines opened and last reported balance.

What Makes UDM Unique

UDM is always on: Think of it as a refresh report everydayCovers all types of new consumer activity: Trade lines, inquiries, secondary re-issue Eliminates any gaps between refresh/gap report and closingSignificantly reduces or even avoids last-minute processing “fire drills” with real-time notifications throughout the loan processWorks for Retail, Wholesale and Correspondent LendingWorks regardless of lender’s preferred credit vendorSends notifications of which loans have credit changes –Eliminating up to 80% of the loans you need to review, which saves personnel time and costs

Allows tracking and reporting for management, agency and regulator review

UDM Testimonials – Crescent & Prospect

Want more information on Undisclosed Debt Monitoring?

Contact your Sales Representative or call800-258-3488 x1405