For most underwriters, calculating income is a manual process, often characterized by inefficiency, inaccuracy and lack of standardization.
Although there have been some advances in delivering a digital data stream to underwriters, once they get the data, the process often reverts to a manual data entry, spreadsheet and pencil-and-paper exercise.
The fact that that many players have focused on the front-end point of sale to create an enhanced digital consumer experience has been well-documented. It’s time to do the same for one of the functions that is critical to the back-end loan decision—income calculation.
While passive income streams (e.g., owned businesses, royalties, rental and multi-level marketing) and portfolio income (e.g., stocks, shares, capital gain, collectibles, currency exchange) introduce complexity around income analysis, calculation and documentation, even traditional income streams (salaries, wages, commissions, bonuses) which may initially appear straightforward, often require multiple touches and redundant review cycles. As every underwriter knows, each borrower’s income situation is unique and presents its own set of challenges.
Then of course, there is also the human factor. Different underwriters calculating the same borrower’s income may come up with different amounts due to inconsistent interpretation of underwriting guidelines, income calculation processes and practices. In the case of an audit, underwriters need to be prepared to show documentation of their decisions and rationales.
Since tax season is in full swing, I think it’s timely to compare calculating a borrower’s income to filing one’s taxes. If you’re like most taxpayers, this time of year brings a nagging sense of dread along with it, particularly if you’re going to bite the bullet and do your taxes yourself. But what was once an agonizing, time consuming, and error-prone process has become easier and more accurate thanks to the development of do-it-yourself tax preparation software solutions.
Why? It’s simple: The software guides you, step by step, through the entire process. It asks a series of simple questions, and before you know it, you’ve submitted your income taxes. These off-the-shelf tax preparation solutions have truly made the process faster, more accurate, and have the added benefit of empowering their users.
I don’t know about you, but I always feel a little bit smarter after I’ve navigated the 1040 labyrinth and successfully submitted my taxes. By delivering 100% accurate calculations, an automatic comprehensive review, and a guarantee that the software will identify the maximum refund available, these tax preparation solutions take the pain and uncertainty out of a stressful process.
The success and popularity of these tax software solutions raises an obvious question for us as a mortgage industry. When is someone going to be able to provide this kind of functionality for our mortgage underwriters? The answer: we’re on the precipice.
Today, the industry has the data, the tools and the technology to apply the same kind of logic to income calculation. It can be summarized in three words—automate, streamline, standardize. It starts by automatically extracting a borrower’s income data directly from their tax returns, transcripts K1s, W2s, paystubs and VOEs.
Once extracted, these data points could be automatically analyzed against GSE, VA/FHA and Ability-to-Repay compliant rulesets along with your unique underwriting guidelines (sound anything like the Internal Revenue Service Code?).
Once populated into a standardized workflow, underwriters would be able to easily collaborate and respond to messages, update calculations, document exceptions and decision rationales. A unique income profile could be created for each borrower so that the software could intelligently suggest new sources of potential income for consideration and help identify missing and recommended documents to complete the income calculation.
To streamline audits and minimize buyback risk, any income and asset verification solution must provide a comprehensive and clear audit trail, with levels of detail that will trace source data and the analysis from inception to the underwriting decision. Regulatory agencies such as the Consumer Financial Protection Bureau are demanding more transparency to provide consumers with more control.
The result: More accurate, consistent and auditable results in a fraction of the time—turning an entire team of underwriters into income calculation experts.
Sound too good to be true? We don’t think so.