Looking Beneath Borrowers' Information
Corroborating income and tax figures can keep brokers out of trouble
By Brannan Johnston, vice president of income and deposits, Experian | bio
Faced with new and proposed regulations, the mortgage industry has placed increased emphasis on more-diligent and better-informed lending practices.
Because of the changing regulatory and lending environment, many mortgage brokers look to improve risk-management practices so they can mitigate fraud and prevent lending mistakes. Requiring borrowers to provide their income, then validating that information through a third-party income-estimation or -verification service, represents a best practice that has gained widespread attention throughout the industry. Moreover, new validation and verification services have emerged, making it possible to gauge borrowers' loan-repayment ability more accurately. These services can help brokers evaluate potential borrowers and reduce fraud in the origination process dramatically.
A new type of model available to brokers is income estimation that validates consumer income in real time. Income-estimation models provide an objective, third-party reality check against borrower-provided income and can prioritize more time-consuming and expensive verification methods for those borrowers most likely to be misstating income. Such models typically vary in terms of their allowable uses and accuracy.
When considering income-estimation models, brokers should look at Fair Credit Reporting Act and Equal Credit Opportunity Act (ECOA) compliance to ensure the models meet critical mandates. It's essential to examine the predictors used in the model to ensure that inclusion of any demographic variables remains strictly within ECOA guidelines.
It's also important to consider the source of the income data on which the model was developed. The best models are built from verified income data and include a comprehensive evaluation of income sources, not simply wage data.
A truly effective estimation model will capture borrowers' complete financial picture, providing greater insight into their ability to meet obligations. This type of model improves risk-management efforts by including modeled debt-to-income ratios. It also can put streamlined results in brokers' hands instantly.
Another service available to brokers is income-tax verification, which allows full corroboration of borrowers' stated income as compared to tax forms submitted to the Internal Revenue Service (IRS). The IRS offers tax-verification services, and providers that facilitate the interaction with the IRS do, too.
The benefit of using income-tax-verification services via third-party providers is that they typically offer quality assurance around IRS forms. Many also provide value-added parsing of transcripts and summary reports.
Such models typically enable the identification of potential fraud by identifying discrepancies in stated income, Social Security numbers, filing status, and name or address. Unlike estimating income, however, income-tax verification requires 24 to 48 hours to complete.
In response to rapidly changing market conditions spurred by legislative changes, income-estimation and tax-verification services can help brokers stay ahead of the curve from a risk-management perspective. Implementing these practices can reduce fraud, enable greater efficiency and put business practices in alignment with regulatory mandates.
Brannan Johnston is vice president of income and deposits at Experian. He has launched two products in Experian's income suite -- Income Insight and Income View -- since joining Experian in October 2009. Going forward, he plans to develop additional products that help clients assess and verify borrowers' ability to pay. Johnston holds an economics degree from Princeton University, where he graduated summa cum laude, and a master's degree in business administration from Wharton School of Business. E-mail