Vendors hope for digital data verification boom in mortgage servicing

Government-sponsored enterprise Fannie Mae recently began explicitly allowing mortgage companies to use vendor technology that could help reduce the turnaround time when submitting information used to evaluate distressed borrowers for loan modification options.

The automation, which gives mortgage companies consumer-permissioned access to bank or payroll information, has been used to help qualify a borrower for a new loan, but it is used less frequently in servicing, where the implementation of new technologies overall was less common prior to the pandemic.

So Fannie Mae’s decision to spell out that it allows digital data verifications of income and asset data in its “borrower response package” could come in handy as pandemic measures expire and a wave of people need to transition to new options. But what the servicer and borrower adoption rate will be like remains to be seen.

“Fannie taking a play out of the digitization of the origination playbook and offering it to servicing is a huge leap,” said Brent Chandler, founder and CEO of FormFree, in an interview. FormFree is one of the vendors providing digital verifications and analysis of the data obtained from consumers’ banks or payroll providers. Its verifications return an analysis of a year or two of historical data on borrowers.

Freddie Mac does not not have a formal policy related to the use of asset and income verifications in servicing but generally allows them based on guidelines for work with outsourced vendors, which call for them to offer compliant and secure systems, business continuity measures in place, and “prompt and accurate responses to borrowers.”

FormFree has been getting a lot of inquiries about using digital verifications for servicing from existing customers that use its technology to help qualify borrowers for new loans, Chandler said.

Among the developments driving interest is the fact that the Consumer Financial Protection Bureau has warned servicers that it will be watching closely to make sure they work with borrowers in compliant ways as payments suspensions end, he said.

Also driving increased interest is the volume of loans servicers will have to process as forbearance ends.

“Two million people are still in forbearance today and...very soon...they will be coming out,” noted Christy Moss, a director at FormFree.

While that number is less than half of what it was at its pandemic peak, it’s still much higher than it was prior to March of last year, according to Black Knight’s data. Very few loans were distressed just prior to that time. The most recent weekly data from the Mortgage Bankers Association shows that more than 4% of home loan borrowers overall are in forbearance, while 2.09% of consumers with Fannie or Freddie loans are in the same boat.

Digital verifications of borrower data have been more prominent in the industry since Fannie Mae introduced its Day 1 Certainty program in 2016 and some vendors foresee increased adoption of the technology in servicing as the need for loan modifications grows. (However, in originations, adoption of the technology was partially driven by the beneficial relief for representations and warranties on the data points, which does not apply to servicing.)

“Similar to what we went through with the use of digital verifications in originations, we’re at the beginning of such use in servicing,” said Andy Sheehan, president and chief operating officer for Finicity, in an email. “We’ve already been in discussions with partners, including major servicing ecosystem players to implement the process. So you will see it grow, and I suspect fairly rapidly.”

Verifications of assets are generally done based on direct-source data from financial institutions on banking or investment accounts. Verification of income can be done through integrations with payroll providers that vendors approach in slightly different ways. Finicity and FormFree have both experimented with using bank data alone for this purpose as participants in a GSE pilot called Single Source Validation.

The most common outcome of borrower evaluations during forbearance exits may be a relatively new servicing option known as a deferral, in which the borrower simply tacks the missing payments on to the end of the loan.

However, some borrowers are expected to endure some long-term financial distress from the pandemic, which could lower their income to the degree that they may need to request a lower payment or leave their home. Income and asset verifications may have a greater role to play in these situations.