Why Haven’t Loan Officers Been Told These Facts?

FNMA/FHLMC COVID Updates, Underwriting the Self Employed Just Got a Whole Lot Easier

Another Reason for Early Tax Filing

Now more than ever, with the growth of the gig economy, the need for loan officers to comprehend credit policies surrounding self-employment income is essential. Yet, because of the pandemic impacts on credit policies, the loan officer’s ability to accurately forecast the underwriting decision has never been more complex.

Risk Management 101

Here is the credit policy issue. The pandemic has negatively impacted many employed and self-employed—most notably, undermining their income stability. Consequently, in the early stages of the pandemic, the GSEs provided COVID-specific underwriting guidance that factored income stability issues into the loan manufacture. Notably, last-minute checks on income stability and special rules on COVID impacts to income. However, that guidance is now becoming somewhat dated.

The Good News – For 2021 tax filers, a return to normal

Here is some good news. First, FNMA’s relatively burdensome requirements for underwriting self-employed income have eased a bit.

In early February 2022, the GSEs articulated a return to normative underwriting requirements for the self-employed. But, not in all cases. The underwriting path depends on the most recent income tax filing. These binary underwriting tracks, as related to underwriting the self-employed applicant, are the subject of the LOSJ analysis. If the applicant has filed their 2021 tax return, many of the ambiguous and burdensome underwriting criteria go away with the de-emphasis on interpreting the P & L.

So FNMA now has two tracks when using self-employment income. FNMA requires sellers to continue applying the temporary COVID underwriting requirements if 2020 is the most recent tax return available.

Underwriting the Self Employed Application Has Been Problematic

Believe it or not, the temporary COVID underwriting standards suggest that lenders act as financial analysts in assessing the viability of a business. Unfortunately, the COVID standards require lenders to interpret complex financial statements in a way that is beyond the risk tolerance of many lenders. Hence some of the COVID era underwriting challenges.

Underwriters that are forced to make highly subjective determinations represent underwriting and warranty risk to lenders. The GSEs have always held lenders responsible for parsing financial documents. However, the GSEs COVID requirements have augmented the P & L analysis criteria well beyond the basic income calculus. An overreliance on the P & L analysis requires interpretations and conclusions that may dovetail with inappropriately discriminatory and inconsistent practices.

One of the primary challenges is the overly subjectively determination of how deep to dive into the financial analysis. FNMA uses an “If-then” risk approach to the P & L analysis. Once the lender takes a gander at the P & L, FNMA states, “lenders may find it necessary to obtain supplemental documentation.” For example:

Excerpted from FHLMC Guide and the FNMA Lender Letter 2021-03 pages 4 of 6

The lender can use the following guidance when performing the assessment of business operations and stability and must complete the business income assessment based on the minimum additional documentation above (P & L plus applicable supplementary documents e.g., bank statements). In some instances, the lender may find it necessary to obtain supplemental documentation listed in the examples below.

    • Is the impact to the business operations negligible due to the nature of the business? For example, obtain a written explanation from the business owner or confirmation that income is seasonal apart from the event timeline.
    • Have business operations been maintained or modified to support continued business income? For example, review an updated business plan.
    • Is there a demand for the product or service currently offered by the business? For example, obtain current business receipts or purchase contracts.
    • Impacts to the business operation, revenue and/or expenses, such as a break-down in the supply chain that is needed to maintain the product, a higher cost of expenses to obtain the product, or a lack of consumer demand for the product or service.
    • Whether the business is part of an industry that is experiencing increasingly negative pandemic-related impacts.
    • Reputable news sources and economic forecasts related to the business industry and pandemic progression.
    • Whether the business type is in what is considered a high contact-intensive industry and if the higher risk of exposure to COVID-19 may present an impact to the potential for income stability and/or continuance until the medical issues surrounding the pandemic are closer to being resolved, whether or not there are State or local orders that temporarily restrict the business operation.

Are they kidding? Okay, let’s see your business plan? How has the supply chain disruption impacted gross sales or the cost of goods? Could you show me some receipts? Hmmm, only six Daily Specials on the 14th? It looks like demand is down. I find the income unstable – Loan denied.

Hey, CNN said the supply chain issues are resolving. In addition, the Wall Street Journal survey of leading economists indicated the GDP would increase by 3% in 2023. So, based on the COVID positivity trend analysis of the business service areas and the CNN report, I’ll approve this loan!

I’d cry if I wasn’t laughing so hard. What the GSEs have accomplished, and it’s a shrewd move, is to push more COVID risk to sellers.

Next week the Journal continues to unpack the GSE’s current state self-employment policies.

Fannie Mae LL-2021-03 Page 1 of 6
Lender Letter (LL-2021-03) Updated: Feb.2,2022
To: All Fannie Mae Single-Family Sellers
Impact of COVID-19 on Originations
COVID Updates, Feb. 2, FNMA Lender Letter here:


Behind the Scenes
Getting in Tune with the Times
Why the Customer Thinks You Did A Lousy Job

If you are not seeing the handwriting on the wall, here it is – digitization. The efficiencies enabled by electronic commerce have rendered hard copy and analog processing inefficient. Vendor services for electronic verifications and document management are likely going to be the next must-haves after the loan origination system. With the industry contraction, profits will be under pressure. That always drives efficiency. This market contraction may be the catalyst that moves the goal line on efficiency.

A recent mortgagor survey conducted by fintech company Fincity (a Mastercard enterprise) reveals useful information about the loan manufacture.

From the 2021 Fincity Survey

“The most frustrating part of the loan application process for the majority of respondents is connected to the recurring inefficiencies associated with providing physical copies of financial documents. This frustration comes as no surprise when looking at the fact that digital natives make up the largest percentage of survey respondents, with 84% falling between the ages of 18 and 44.”

“Borrowers utilizing digital verifications were less likely to say the loan process was the most stressful part of the home buying experience by half when compared to borrowers NOT using digital verifications.”

“Trust and low interest rates rank among the top reasons consumers select their lender of choice. Additionally, their last lender is the biggest indicator in selecting their future lender.”

From Fincity

“Digital verifications streamline mortgage lending by removing friction with borrowers, cutting origination times with fast processes, and moving borrowers more quickly through the conversion funnel. The most innovative technology also goes a step beyond simply removing friction with borrowers to also deliver a quick and secure user experience that simplifies the verification process.”

“Streamlining income verification isn’t just about speeding up the process. Digital verification solutions also address the risk- and fraud-related problems associated with manual verification. Physical documents received from borrowers can be unreliable. Inaccurate information leads to poor decisioning. Legacy technology that requires copy-pasting and re-keying leaves ample room for error. More risk and higher chances of fraud cost you more time and money in the end. Early Warning reports that “instead of getting information directly from financial institutions,” relying on manual verification “costs banks and lenders millions of dollars.”

“Fintech ultimately improves credit decisioning with solutions that provide more accurate data and deeper insights into a borrower’s financial situation, all while cutting the time and risk associated with manual processes.”

Think about going back to handwritten loan applications and drop-boxes. Is your loan manufacture headed for obsolescence? So careful, the way of the DoDo is never planned.


Tip of the Week
How to Unveil the Prospect’s North Star

What is the buyer’s true north? In dealing with the buyer, it appears evident that the overreaching goal is getting a mortgage. Or is it? Is the prospect’s goal to get a mortgage? No, of course not. I want to grow up and get a mortgage. Is it buying a house? While it is exciting at times, many people find buying a house and moving is a pain in the rear (see the story about what bugs consumers). Is homeownership the ultimate goal? I get these magnificent tax deductions, and watch me rake these leaves!

Some of us are privileged and don’t have to fret too much over plumbers, electricians, painters, and the like. However, most homeowners fall into the “do it yourself” or “pay money you don’t have” categories. Homeownership is better than no homeownership but isn’t precisely a guarantee of contentment, peace, and joy.

The North Star is the overreaching objective that guides the prospect’s actions. Homeownership is not the goal. Nor is making money the objective. Those are the means to the actual objective. The criteria are, in general, satisfaction, peace, or even happiness. People use different expressions for the thing most of us are chasing. Contentment. Peace. Joy. Happiness. These things are anticipated in the present and the future. These things are both attained and yet attained. But never enough. To be content I need more contentment :).

Therefore, if the goals are happiness, peace, and contentment, it stands to reason there is much more we can do to meet the objectives than deliver a mortgage. The LO can deliver peace, happiness, and contentment. Not forever, but the LO can move the dial in the right direction during the loan manufacture. If you meet two or more of these needs, that’s a home run.

Develop clear success criteria. And don’t forget the ultimate success criteria, to provide peace, joy, and satisfaction throughout the loan manufacture. The paramount concerns include the stakeholder’s impression of the project’s success and how that success is defined or measured.

People can better tell you what detracts from their peace, joy, and happiness rather than say what brings them these things. But don’t neglect to ask your customer what will bring them joy, peace, or happiness during the loan manufacture. You are probably not going to use those terms, but rather “What are your greatest concerns about getting a mortgage?” or, “What is the one thing that guarantees that the loan process exceeds your expectations?” Generally, people think the three things are the absence of pain or threats. Try to speak their language.

Get together with a diverse group of internal and external stakeholders and develop the questions you need to ask. Here is a hint: Get opinions from people who see things differently than you do. Right now you are already overweighting what you think makes your customer happy.