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The need to carry out extensive customer appraisal, before arriving into a final lending decision has grown more important than ever before. The need is not just about meeting federal mandate, but more about gaining control and minimizing chances of loan defaults. Today, a lender’s responsibility goes well beyond collecting information about the borrower’s present status via examination of his proof-of-income (pay stubs, tax returns, proof of additional income and benefits such as social security and child support), assets and liabilities, financial details of a divorce (if any) and involvement in lawsuits. Lenders should also probe further to ascertain the borrower’s authenticity, intention and potential to utilize and settle credit in a desirable manner.

More to It Than Meets the Eye

Over the years, it has been observed that mortgagors deliberately withhold or modify valuable information, while applying for mortgage loans. In most cases, it is difficult to detect such falsification of information before the damage is done. This imparts additional responsibility on the latter, to go forensic into an applicant’s finances, execute field visits and document all details. Theoretical data and figures provided in the loan application form should initially be taken with a pinch of salt and trusted only after the completion of verification process. This helps in verifying genuine requirement, guaranteeing pro-marginal error in calculation of loan margin and timely recovery of funds, in isolation of security.

Keeping a Close Eye on Repayment

The lenders role in determining the borrower’s ability to repay, bad loans does not end with the initial round of investigation. The role of investigation further extends into regular monitoring of repayment of the loan. A customer’s difficulty in repaying loans needs to be spotted early and renegotiations need to be initiated before they turn defaulters. Post the massive foreclosure crisis in the residential real estate sector between the years 2008 to 2010, the federal government introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act Ability-to-Repay or Qualified Mortgage (QM) amendments to the Truth in Lending Act (TILA).  The state legislatures also followed example and enacted regulations to arrest predatory lending practices, which were the root cause of the economic catastrophe. In 8 states, these reforms have been restricted to a minority of risky loans (~8%) such as interest-only loans, those involving balloon payments, compounding principal and those extending beyond 30 years. But in 12 other states and D.C., rules have been made stricter than federal regulations and apply to all types of loans. Although these propositions apply to a minority of debtors, they provide assurance of loan recovery to underwriters, according to given terms or upon release of court orders against foreclosure proceedings.

Loaners also have the responsibility to scrutinize any dubious transactions or circumstances that may have triggered questions over the integrity of the debtor. In case of vigilance failure, the lender could be at the risk of losing his “bona fide” status i.e. his interest in the property may not remain secured by law. Also, if any foreclosure rescue scheme or other illicit activity is sensed, the bank lenders must compulsorily file Suspicious Activity Reports (SARs). While all these are of paramount importance, it is also imperative for mortgage lenders to keep track of the latest legal developments in their respective states and exercise prudence before lending out money.