The mantra for this week is to forget what you know about the mortgage process and think of ways to re-define it. Today, I am going to disrupt the “way we have always done it” in underwriting.
Our industry is going back in time to a place where loans were underwritten manually. This is occurring because the AU systems cannot be properly defined to match up with Ability to Repay logic. Compound this with the fact that underwriters can be costly, hard to find and are only underwriting 3-4 files in a day and we have a huge issue.
AU came about as an efficient way to do business in a non-biased way. Yet the industry blew up in our face bigger than anything we have ever seen and those results were not achieved. Now that we are back to square one, perhaps it is time to re-position our positions!
If we are to demonstrate Fair Lending in underwriting we must do our best to remove any form of bias. Removing all bias is not possible if a human is involved in the decision, because we all have positive and negative reactions to certain triggers. This is what makes us wonderfully different. Yet this inherent bias is what causes good and bad decisions, based on our beliefs, no matter how we try to deny that they exist!
The next question becomes how do you remove as much bias as possible? First, start with the triggers that cause Fair Lending bias. This is accomplished by splitting the duties of the underwriter into more manageable positions where being an expert is possible. It is impossible to be an expert in all areas of risk, fair lending, operations and legal in today’s mortgage world.
•One underwriter should specialize in credit review and acceptance based on investor guidelines.
•Another underwriter should specialize in collateral review and acceptance based on investor guidelines. If either rejects a loan then a second review is done by a more senior person in each of those areas.
•Another position can review, prior to loan submission, those documents that have to be prepared in a timely fashion and correctly such as the GFE, TIL, Loan application. Those are functions that are more compliance/legal in nature.
To properly do this, you cannot take the file and split it in three. While the non-decision maker (let’s use the term processor in this example) has all of the file information, there is no need to pass all of that information to all parties. Stay open minded and stay with me!
- The collateral information should go to the collateral underwriter without the mention of any borrower identifying characteristics. Their job is to evaluate if the collateral is acceptable.
- The credit profile minus borrower names, address, race, sex, ethnicity, age, etc. should go to the credit underwriter. If the credit/income/assets and payment profile are acceptable to purchase a property for “x” sales price and “x” loan amount, why do you need the other information?
- The document acceptance/legal underwriter will look at disclosures, thresholds, timeliness, fraud, etc. in order to meet the investor guidelines.
All are under the same timing constrictions but each is an expert. This eliminates one person having to research, wait for answers, etc. to approve, deny or condition a file. If one part of the file is weak the processor works on that portion of the file. Communication with the client only occurs when all results are in. Efficiency improves because the job function allows the specialist to focus on their area of expertise. For you CFO’s out there the cost to perform the underwriting function goes down. Now you pay for the senior people to oversee, answer issues and re-review, but not to look at every file.
If you think I’m wrong or right, please tell me why! I’m sure we can all learn from each other!
Join the discussion 2 Comments
While I agree with you conceptually I am concerned that community financial institutions will be concerned that they will not be able to locate quality candidates to address your issues. These institutions will have to develop training to home grow these experts they will need in the future. Another concern is that the future is now! The deadlines for compliance are fast approaching.
Always enjoy your insight.
Thank you Paul. I believe you express what many are thinking and I agree based on our current state of affairs. That said there is no time like the present to make it happen in the future! Many thanks Paul for tuning in and keeping an open mind as we solve complex issues together!