Fannie Mae temporarily drops employment rep and warrant relief

Fannie Mae has temporarily suspended representation and warrant relief for verification of employment previously performed through its DU validation service.

The change in policy was announced in a May 5 update to Lender Letter 2020-03. It applies to all Desktop Underwriter case files created on or after May 4.

This update also extended all the temporary measures introduced in the letter through June 30 from the original end date of May 17.

Over this period, mortgage originators have an alternative to verbally verifying an applicant's employment status. Fannie Mae is also permitting direct verification by a third-party vendor, as long as the information is not more than 35 days older (120 days for a self-employed borrower) than the note date. The change allows Fannie Mae to prudently manage risk at a time of volatility in employment.

Originators can still use DU validation service to obtain Day 1 Certainty rep and warrant relief for assets and income. However, if prior to the loan closing, "the lender discovers that the borrower is no longer employed, the associated income can no longer be considered in the qualification of the borrower, and the employment and associated income information should be removed from the [mortgage loan application] and the casefile should be resubmitted to DU," the updated Lender Letter said.

The fact that asset and income remain subject to rep and warrant relief is key for lenders, explained Grace Currid, senior vice president at Homebridge Financial Services. But given the rapid shifts in employment status amid the pandemic, and with online database information that could be 30 days old and stale, the change was the right thing to do.

"The fact that they temporarily suspended employment — yes that put a little more manual responsibility on the lender," Currid said. "But because of the timeliness, it was a prudent thing to do, and from where I sit, I want to make sure the borrower is still employed."

Even for existing files not covered by the change it would be wise to reverify employment manually.

A truer picture of a borrower's circumstances, even in normal times, might come from looking at their assets, including bank statements and pay stubs, argues Brent Chandler, CEO at FormFree, an authorized report provider for asset verification for the DU validation service.

In the past, asset verification only went as far as confirming bank accounts and addresses, for most lenders.

But those bank statements include payroll direct deposit information sent through an automated clearing house, including the name of the employer that put the paycheck into the bank account. So that tells the lender that the borrower is still gainfully employed, Chandler said.

The Federal Housing Finance Agency waiver of what constitutes an acceptable alternative form of verification of employment includes bank statements and pay stubs, Chandler said.

"So as it stands today, our bank statement and our pay stub collection is an acceptable form of employment verification, but it was not given rep and warrant relief," he said. That led lenders to continue to do VOE through one of the approved vendors to get rep and warrant relief.

Chandler argued that Fannie Mae's decision to end VOE rep and warrant relief makes "everybody equal. So now, arguably you can pull a bank statement, get the assets, see the employer and qualify that loan on equal footing to any other system you would use.

"What's going to come out of this is a diamond, what's going to come out of this is a new way to calculate risk," Chandler added. "Asset is going to change the way we understand consumer lending, period."