As published in Scotsman Guide's Residential Edition, March 2010.
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.
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