The jury's still out on whether bank account data is a viable alternative to the tedious process of contacting employers to verify a mortgage applicant's job status. But there's already hope that the same data could replace the even more nettlesome task of Internal Revenue Service income verifications.
While Fannie Mae is currently testing new ways to use checking account and direct deposit data to verify a borrower's employment and income, it doesn't appear that large mortgage investors are quite ready to use the data as an alternative to IRS tax transcripts. But that hasn't stopped third-party data providers from getting excited about the prospects.
"This is an alternative that can be used where borrowers will fit into the appropriate criteria based on their net income and their cash-flow streams," said Brent Chandler, founder and CEO of FormFree Holdings, which works with Envestnet-Yodlee to provide automated verification of a borrower's income and assets using data from banks and other sources.
The basic idea is to verify applicants' employer and salary information by identifying the source and frequency of direct deposits and other payroll activity in their checking accounts.
"We're starting with W-2 employees like we did with data validation for Day 1 Certainty, because that is the bulk of the borrower base," said Andrew Bon Salle, executive vice president of Fannie Mae's single-family business. But "that could change over time" depending on the needs of future borrowers, he added.
Fannie Mae's Day 1 Certainty program offers lenders upfront representation and warranty waivers on a number of loan file data points if they use automated verifications provided by approved third-party data aggregators. The initiative is designed to save lenders time during the origination process and make underwriting decisions more accurate.
The new method of using bank account data instead of tax transcripts may prove particularly useful if non-salaried employee income, which relies more heavily on tax transcript verification, becomes more prevalent among mortgage borrowers.
The mortgage industry has long bemoaned inefficiencies and delays in the Income Verification Express System, the IRS service that processes 4506-T requests and provides lenders with borrower tax transcripts. The service is notorious for slowdowns and outages during tax season and is often suspended during federal government shutdowns, like the one in late 2013 that lasted over two weeks and led to industrywide delays in loan closings.
More recently, the industry was caught off guard after the IRS made security updates to IVES late last year that immediately led to crippling delays.
In the immediate wake of the mortgage crisis, lenders would submit a 4506-T to the IRS "on every loan or substantially every loan that they underwrote, even ones that didn't close," which added to mounting expenses and reduced margins in the industry, said Nick Volpe, chief strategy officer at ACES Risk Management Corp.
But the IVES delays and added expense of requesting the tax transcripts have gotten so bad, many investors "made changes in the last year or so that no longer required the lenders to get them, generally speaking, in the manufacturing process," he said.
Instead, lenders have borrowers sign a 4506-T to authorize a tax transcript request, but only submit it to the IRS if the borrower has nontraditional income sources or other riskier characteristics, or if the loan is selected for a quality control review.
"It's changed to become more of a back-end function," for the most mainstream loans," Volpe said.
However, that's prompted concerns about underwriting standards becoming too lax — something that bank data verifications could address. Another benefit of the bank data proposal is that the information is timelier than what's available in annual tax returns.
Still, bank data is unlikely to ever completely replace IVES because the transcripts offer a more detailed and broader view of borrowers' finances.
"I don't think today that you'll eliminate the use of the 4506-T where the 4506-T is needed," said Steve Smith, CEO of Finicity, a financial data aggregator.
Tests have already shown using bank data for asset verification isn't a perfect replacement for employer verification, let alone tax transcripts. Data submissions can vary by bank and lenders can run into issues when mortgage applicants don't deposit paychecks at a bank. Other issues can arise when a payroll services outsourcer or professional employer organization issues paychecks in their own name, rather than the applicant's actual employer.
What's more, some lenders may be hesitant about using the data, even if it's approved by investors.
"We are not participating in that right now," said Magesh Sarma, chief strategy officer for AmeriSave Mortgage Corp., citing a preference for getting information directly from employers as opposed to "trying to surmise" what income a borrower has made based on a bank statement.
Still, there are lenders willing to give single-source income validations a shot. Borrowers have been "absolutely blown away by how simple it is," Bill Banfield, executive vice president of capital markets for Quicken Loans said in an interview last year about its income verification pilot with Fannie Mae.
While bank data may not work in every situation, it could reduce the industry's reliance on tax transcripts and in turn, strain on the IRS and IVES. Meanwhile, efforts are also underway to help the IRS improve its outdated technology, but that requires funding either from Congress or the mortgage industry itself.
A proposal to replace tax verifications with secure access to data from another government source of income validation has been thoroughly researched, but requires legislation that hasn't gotten necessary approvals, said Anne Canfield, executive director of the Consumer Mortgage Coalition.
Using bank information also has some downsides, but it is attractive in that it doesn't require congressional approval, Canfield said.
"Would it replace the 4506-T? I don't know about that. I think ultimately we'd just have to see. We'd want to make sure that it's accurate. That's the bottom line," she said.