It’s hard to speculate what will happen with interest rates starting a new year. The Federal Reserve made cuts to its benchmark rate last fall, but many people were surprised when rates actually climbed after the first 50-point basis cut in September.
Regardless of interest rates and challenging economic conditions, lenders must find ways to attract new business and enhance lending efficiency. A key method for accomplishing these goals involves leveraging third-party, automated verifications that use reliable data sources and advanced analytics.
Taking a data-driven approach can help streamline the application process, mitigate the risks of unreliable information and repurchase defects and provide lenders valuable insights into a borrower’s financial profile. Data can also help empower lenders and the originators who work with them to make more informed decisions and create a more enhanced lending process from application to closing.
Operational pressure
In the run up to the first Fed cut, mortgage rates dropped dramatically. When interest rates decrease, some homeowners are motivated to refinance their mortgages to obtain better terms. This influx of refinancing requests places pressure on mortgage operations teams, sometimes resulting in extended processing periods.
Periods of low interest rates could lead to an easing of credit standards as lenders become more lenient with their credit requirements. Nonetheless, mortgage verification capabilities will still be crucial in assessing borrower reliability, albeit with a potentially larger focus on employment stability and debt-to-income ratio.
The increased volume of mortgage applications might accelerate the adoption of automated verification tools. Automated digital verifications can help remedy issues caused by a rapid influx of potential mortgage applications by streamlining the decision-making process, enabling a frictionless borrower experience and bolstering data security.
Implementing tools like third-party income and employment verification, particularly early in the mortgage process, can effectively reduce risk and help prevent underwriting defects. As lenders have sought to enhance their processes, many have gained efficiencies through automation. Choosing to automate at the right points in the process can make a difference, however.
For example, many lenders have achieved optimal results by inserting automated income verifications at the start of the application process and then conducting a verification of employment during underwriting and the decision-making phase.
Another employment verification pull might also be conducted before closing a loan. Savvy lenders have even identified a solution that includes the option for multistage verifications, further streamlining their processes. This allows lenders to gain instant, secure and up-to-date information throughout the origination process to maintain loan quality.
Potential risks
Lenders have a variety of options for verifying income and employment data, from in-house or consumer-provided options, to working with external companies. Different methods for obtaining verification come with their own sets of advantages and disadvantages.
Lenders and borrowers alike should consider all their available options and select providers that best meet their needs. From a risk perspective, lenders need to carefully consider the terms and conditions of potential data providers to ensure high security and data privacy standards. Typically, these standards are not shared across all third-party providers.
For instance, some third-party data aggregators are known to access financial data directly through consumer accounts — often requiring consumers to share sensitive login credentials in the process. This may include the consumer’s credentials for their employer’s payroll or human resources information systems, as well as for bank and financial accounts. In many cases, data providers may keep a borrower’s credentials and employment data unless the consumer instructs otherwise. This puts both lenders and consumers at risk in the event of a security breach.
Like lenders, consumers derive numerous benefits from data-driven lending practices, which can speed up the mortgage process and result in faster closing times. But not all data gathering methods are necessarily consumer friendly.
In addition to problems stemming from inconsistent security and privacy standards, some data providers also require consumers to create a new account within their platform to review collected data before providing it to a lender. This is more time-consuming and leads to a slowdown in the borrower’s time to close.
More data can be better, but lenders should exercise caution about where they obtain that data. They could experience a reputational hit in the event of a security issue that affects their borrowers’ data, and consumers should be careful about having their data linked to third-party data aggregators longer than needed. Leveraging automated digital verifications can help protect lenders and borrowers alike while creating a better lending experience for both parties.
