Proving Ability to Pay, the Paperless Way

by 18 Apr 2013

Like many entrepreneurs with a business idea, mine was born out of personal frustration. When I was buying a house in Athens, Georgia, I became dumbfounded by the amount of important paper documents I had to submit in order to close the deal. Having spent years creating technologies for the financial services industry, I thought we’d passed the age of photocopies and faxes. But we hadn't and I knew there had to be a better way.

I started a company that specializes in taking paper out of this process. While electronic processes do eliminate a huge amount of waste and hassle from the lending process, there is also another, more important reason for lenders to say goodbye to paper. Paperless processes can actually take the strain out of figuring out how to comply with one of the industry’s tough new regulations.

“Ability to pay” lies at the heart of new Consumer Financial Protection Bureau (CFPB) regulations, which require lenders of all residential mortgages to verify the borrower’s ability to pay back the loan.  But what exactly does “ability to pay” really mean – especially if there are always going to be some borrowers who will not or cannot live up to their mortgage obligations?

To figure this out, let’s start at the beginning. According to the CFPB, lenders must prove a borrower’s ability to pay by demonstrating and taking into consideration certain factors, many of which used to be evaluated in the mortgage industry on a fairly routine basis before the housing bubble of the mid-2000s:

  • Current or reasonably expected income or assets
  • Current employment status
  • Monthly payment on the covered transaction
  • Monthly payment(s) on other current loan(s)
  • Monthly payment for mortgage-related obligations
  • Current debt obligations, alimony, and child support
  • Monthly debt-to-income ratio or residual income
  • Credit history

Several of these items do not require much work. For example, the lender will already know the monthly payment for the borrower’s first and second loan (if applicable), and will have calculated what the borrower’s monthly obligations will be for mortgage insurance and property taxes, which are often placed in an escrow account and made part of the borrower’s monthly mortgage payment. A credit report can be easily obtained, and provides underwriters with a snapshot of the borrower’s past credit performance. The borrower’s employment status is slightly more trouble. Copies of paychecks and a verification of employment form sent to the borrower’s employer will do the job. This process is often paper-based, but it’s a yes/no type of verification.

However, after these issues are resolved and lenders begin to look more closely at the borrower’s financial picture, things start getting tricky. Lenders can file a 4506-T tax transcript request to determine the borrower’s income for the previous year. But to get current income and asset data, they will need to rely on the borrower to provide paper copies of all bank and investment account statements. This process is, at the very least, annoying but potentially much worse.

Copies of bank statements give underwriters a picture of how much money a borrower has in the bank, but that picture can be pretty murky and not easily understood. There’s an account balance at the end of every bank statement, but there are also a lot of transaction details that the underwriter has to read through in order to get a complete picture of the borrower’s financial standing.

Remember, under new ability to pay rules, lenders also need to verify the borrower’s current debt obligations, including any alimony and child support, in addition to monthly debt to income ratios. But not all of the borrower’s debt – including alimony and child support – is found on the borrower’s credit report. If a borrower has these additional debts or obligations, and thinks that by disclosing these debts to their lender they may not get the mortgage they want, they may not actually disclose them.

Here’s where paperless processes come in. Evidence that a borrower has these sorts of debts will most likely be on their bank statements. In fact, bank statements are the best source for determining a borrower’s monthly debt-to-income ratio and determining whether they receive any residual income. But it’s up to the loan officer or underwriter to find them, and when inspecting paper copies of bank statements, it’s not easy. It is true that a seasoned underwriter who reviews dozens of bank statements every week will know what to look for. But there’s a chance they won’t, too. Either way, they’ll have to calculate debt-to-income ratio, income, assets and additional information by hand.

But the issues with paper bank statements aren’t limited to being cumbersome and fraught with opportunities for error. There is a darker, more treacherous aspect to traditional verification of deposit and asset functions. They are ripe for deception.

Mortgage lenders originated $13 billion in loans containing fraudulent information in 2012, according to recent estimates from CoreLogic, a leading provider of information, analytics and business services. A significant portion of mortgage fraud, industry experts say, is doctored bank statements. And honestly, it’s not terribly difficult for someone to cut and paste false numbers on a bank statement and submit a scanned or faxed copy, or to download bank statement templates off the Internet (try searching the phrase “fake bank statements” on Google) and use digital imaging or graphic design software to fabricate proof of one’s imaginary assets.

I don’t mean to heap all the guilt on unethical borrowers. When it comes to fudging numbers, there have been unprincipled lenders and loan officers who deserve blame, too. But regardless of who does it, passing off fraudulent asset numbers is costly and wastes time and effort, even if it is caught before the loan closes. But what are lenders to do?  You guessed it — go paperless.

What many people in our industry do not yet realize is that thousands of banking and investment institutions allow mortgage bankers, auto financers and credit companies to access banking records electronically – with the borrower’s permission, of course. This has recently paved the way for a paperless, automated verification of deposit and assets (VODA) that can happen in just minutes, saving both lenders and borrowers the frustration of digging through files, making copies of bank statements, and sending, sorting and deciphering them. This feat alone makes fulfilling several items on our list of “ability to pay criteria” much, much simpler. And yet, this advance in the VODA process has done even more.

Using verified data from a third party that cannot be edited by the borrower or lender virtually eliminates fraud from the process. This protects both the lender and the borrower, because the data is coming straight from the source. Another benefit to automating this process is that, by receiving reports electronically in nearly any format, lenders can easily scope out anomalies in a borrower’s bank statement. This may include monthly payments that were not apparent on the borrower’s credit report in addition to any unusual deposits that came from an undisclosed source.

Plus, now that the process is electronic, even more powerful tools — ones that couldn’t possibly exist with paper processing — can be introduced to the process, such as the ability to monitor the borrower’s accounts during the loan transaction in case his or her assets drop below a predetermined level. Raw bank account data allows monthly debt-to-income ratios to be automatically calculated, and if lenders access bank records going back three months, they can get evidence that supports the borrower’s current income, because those records will show steady credits to the borrower’s account from his or her employer.

So why aren’t all lenders using these tools? My answer is that eventually, most of them will. The CFPB’s ability to pay rules – which are scheduled to become final next January – go further that what is currently required of lenders, and will provide extra incentive for lenders to double down on the verification process if they hope to avoid audits and stay out of trouble. As though that’s not incentive enough, there’s yet another reason that the process is ripe for automation, and that is productivity. Lenders that adopt an automated VODA process early are going to quickly set themselves apart and be able to process loans faster, which will be a huge benefit to them when the purchase market eventually returns to good health.

Obviously, it’s a bit late to make my own home purchase less frustrating than it was. But it’s not too late for millions of future home buyers. And it’s certainly not too late for originators of all sizes to take advantage of automated asset verifications – or, for that matter, to benefit from other automated solutions that can make the origination processes both faster and safer. In fact, with new mortgage rules just around the corner, I’d say their timing would be perfect.



Brent Chandler Mortgage Professional AmericaBrent Chandler is the founder and CEO of FormFree Holdings Corporation. He can be reached at



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