REQUIRED READING: You Can Never Have Too Much Transparency

Written by Stacey Simpson
on May 22, 2009 No Comments
Categories : Required Reading

#039;s been called many things: an economic meltdown, a watershed event – even a deep recession[/b]. Regardless of the label, the storm has reached across industries and geographies, leaving few in its path untouched. The impact on financial institutions and lenders is unprecedented, as many struggle to recover from losses due to delinquent loans and massive write-offs. According to Equifax research, first-mortgage lenders experienced a dollar delinquency rate increase from 5.17% in September 2008 to 5.83% in November 2008. For lenders, this translates into untold dollars at risk due to delinquent loans. Looking beyond the statistics, one thing stands out: the need for increased transparency. To weather today's credit crisis, financial institutions must achieve greater transparency within their portfolios and loan data. A deeper view of their customers and an understanding of not only a borrowers' propensity to pay, but also their capacity to pay, will be essential to withstand market dynamics and better manage risk. Achieving this deeper view will mean adopting an ‘out with the old, in with the new’ approach to the mortgage lending process. [i][b]The old way[/b][/i] In the past, lenders focused primarily on convenience and speed when originating loans. While expediency and rapid application processing are important, origination can easily go awry – as evidenced by the aforementioned statistics – when it is embraced at the expense of due diligence. Much of the due diligence sacrificed in recent history relates to lenders' often making decisions by relying solely on credit scores and other traditional data points. While a credit score is a useful tool in evaluating the creditworthiness of a borrower, there are other important factors lenders must consider to have the full picture of borrowers and their portfolios as a whole. One key factor that has been often skipped is employment and income verification. This data, which indicate borrowers' ability to meet loan commitments based on their most current income, can be difficult to obtain without the right tools, and it is not always current. Lenders who have used this data have typically relied on manual processes to get it, resulting in laborious, time-consuming and inefficient processes. Additionally, in an uncertain lending environment, trusting strictly paper-based employment and income verification puts lenders in a vulnerable situation. It is far too easy for unscrupulous borrowers to tamper with, inflate or even falsify employment and income documentation. The entire mortgage process can take several weeks, and in today's economy, it is very possible for a borrower to become unemployed or change jobs during the mortgage process – and not disclose the employment changes to their loan originator. The old way of doing things has had numerous impacts on mortgage lenders. For one, reliance on relaxed lending practices has resulted in lenders' granting loans to consumers who did not truly qualify for mortgages, especially at exotic rates and generous loan terms. In addition, more and more loan products were developed that enabled lenders to bypass fundamental underwriting steps, such as employment and income verification. While more loans were approved at a much faster rate, the success came at a much higher price, as lenders lacked critical transparency across their portfolios and financial products. Gone are the old days – and the old ways – of relying solely on credit data and scores to make lending decisions. In the coming months, financial institutions will need to fortify the infrastructure of their decisioning systems with tools and data assets that can better align them with today's market needs. The good news is that there is a new way. This is where automated employment and income verification comes in. [b][i]The new way[/i][/b] Today's automated employment and income verification processes give lenders a key advantage in gaining the transparency they are seeking. This advantage is a 360-degree view of a financial institution's customer base. With a deeper view of their customers, lenders gain the insights they need to better manage all aspects of the lending process. This newly aggressive focus on automated employment and income verification offers benefits in many areas. [b]Account origination.[/b] Lenders can better meet underwriting requirements by reviewing a borrower's employment status and income data. With greater transparency built into the loan origination process, lenders can determine how to help their borrowers and put them in appropriate products, thereby reducing the number of bad loans. [b]Portfolio management.[/b] With employment and income data, lenders also gain more transparency into their current loans and the risks or opportunities associated with their portfolios. For example, they can better determine their level of exposure and assess how close they are to having outstanding loans. Lenders also can gain insight into a borrower's ability to pay and confirm if late payments or pending foreclosure are a temporary employment-related situation that can be addressed differently. [b]Risk management.[/b] Lenders not utilizing an automated employment and income verification solution run the risk of originating an increased number of fraudulent loans. Without the most up-to-date information, lenders' ability to confirm the truthfulness of an application becomes much more limited. Couple that with the fact that, in many cases, a borrower's employment status and salary history have changed, and the opportunity for a financial institution's exposure to financial loss can increase significantly. [b]Compliance.[/b] With an automated solution, an organization also improves general consistency and compliance internally. Because loan processors might use different methods and ask different questions of the applicant, an automated system ensures that a pool of loan processors applies consistent criteria to gather loan documentation. This helps ensure standardization of data-gathering techniques, while alleviating the pressure for sales staff to manually verify both employment and income data. On the risk side, potential for default and loss decreases, as lenders are less likely and able to cut corners when using an objective, third-party automated solution. [b]Process improvement.[/b] Enabling lenders to verify employment and income data in real time provides many benefits. Previously, most lenders confirmed this information using a tax transcript, which, in some cases, is sufficient. However, if a loan processor underwrites a mortgage using a tax transcript from over a year ago, the data are no longer current. To avoid increased risk, the lender has little choice but to contact the borrower or employer for updated employment and salary information. In addition to all of these factors, having access to automated employment and income data also helps lenders with customer relationship management. With this insight, lenders eliminate the need to go back to borrowers over and over again to verify information – an often time-consuming and inefficient process. Ultimately, this data provides new insight into what customers want and need, empowering lenders to better manage their customer relationships. With unemployment numbers projected to increase, having access to up-to-date employment and income data becomes more important than ever for financial institutions as they seek to minimize default risk. For lenders, a lack of current employment and income data could mean the difference between loan transparency and opaqueness, or in other words, between smart decisions and massive write-offs. Most of all, the ability to overlay income and employment data with credit data gives lenders the predictive power they need not only to comply with increasing regulations, but also to manage risk. And, as today's lenders know, risk management is everything. [i]Stacey Simpson is president of The Work Number at TALX Corp., an Equifax business unit. She can be reached at (314) 214-70

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