Magazine article Mortgage Banking

Rising Percentage of Borrowers Unemployed within Three Days of Closing

Magazine article Mortgage Banking

Rising Percentage of Borrowers Unemployed within Three Days of Closing

Article excerpt

ALTHOUGH THE CONSUMER FINANCIAL PROTECTION BUREAU (CFPB) requires lenders to ensure that borrowers have the ability to repay their mortgages, the percentage of unemployed borrowers within three days of closing increased in fourth-quarter 2014 (the latest data available), exposing lenders to unanticipated risks.

The risk that a borrower was unemployed within three days of a closing increased to 0.74 percent in the last quarter of 2014 compared with 0.70 percent in the third quarter, according to Advanced Data Corporation's Jobless Borrower Index (AD-JBI).

The AD-JBI reflects the percentage of borrowers who were not employed within three days of their mortgage closing, and is therefore, a symptom of hidden risk because lenders are unable to identify it and eliminate their resulting exposure. One can only imagine the loan performance problems that lie ahead in servicing loans made unintentionally to out of work borrowers.

Over the past 16 quarters, an average of 1.03 percent of borrowers were unemployed within three days of closing on their mortgage. The index reached a high of 4 percent in the second quarter of 2011 and hit a three-year low of 0.53 percent in the fourth quarter of 2013, as well as 0.54 percent in the fourth quarter of 2012.

These statistics are based on aggregate percentages derived from individual verifications of employment during the origination process.

To ensure that credit was extended to borrowers with the means to repay their loans, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB established the ability-to-repay rule--a regulation that requires lenders to make a good-faith effort to determine if borrowers can pay back their loans.

To determine if borrowers can afford their loans, lenders have to consider employment, income, assets, debts, credit history and other factors.

Lenders are required to document that they analyzed these factors during a regulatory audit. Moreover, to help ensure that borrowers can repay their loans, and to help insulate lenders from being sued for not taking steps to ensure ability to repay, the CFPB created the Qualified Mortgage (QM) that functions as a legal safe harbor.

Given all the regulatory requirements imposed on lenders to ensure borrowers have the ability to repay their loans, it's surprising that the percentage of borrowers who were unemployed three days before closing crept up in the fourth quarter.

There are relatively few circumstances under which a lender would extend credit to a borrower who was unemployed at the time of closing, except of course if the lender did not know the borrower was unemployed. That risk does exist when lenders don't add verifications of employment to their processes--both when the application is taken and another three days before the close.

When it comes to verifying employment and protecting their institution from regulatory scrutiny, the best approach is for lenders to verify employment and not solely rely on the truthfulness of borrowers.

To be sure, failing to know that a borrower is unemployed is not an excuse likely to resonate well with the CFPB. It's not much of a stretch to assume that lenders will face scrutiny if they don't verify employment and end up lending to unemployed borrowers who later default. …

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