One of the ironies of the mortgage industry's time in the wilderness is there is some expansion.
The problem is that the growth poses a quandary for lenders: In the case of refinancings, the spike is tenuous and sensitive to shifts in rates, complicating staffing. And any growth a lender does enjoy is coupled with another kind of expansion: Risk management is becoming more complex as lenders perform broader due diligence on a higher percentage of borrowers.
It's a cocktail of challenges tailor-made for outsourcing to automation-friendly third parties that charge monthly fees based on fluctuating transaction volume, allowing lenders to get outside help with vetting while controlling labor costs. Tech firms like Equifax's The Work Number and Kroll Factual Data are aggressively courting lenders to meet this demand, particularly down market.
"It's too expensive for the average lender to do this on its own," says Craig Focardi, senior research director for TowerGroup in San Francisco. "But [specialists] can provide a higher standard of accuracy."
Aite research says 50 percent of community banks now require more information from borrowers than last year, and that 73 percent have seen a rise in delinquencies and chargeoffs, providing an additional argument in favor of lenders seeking outside help to vet borrowers. "There's an unwillingness among lenders to rely an borrower-provided information anymore," says Laurie Gatch, manager of business development for The Work Number.
Gatch wouldn't provide details on how much more volume it's getting from a spike in third-party verification, but says casting a wider risk management net has become part of its conversations with clients. "There's a huge risk factor now. Banks that may have gone ahead with a certain loan based on a credit score along are no longer doing that."
Frontier Bank, an Oklahoma City-based institution that originated about $60 million in mortgages in the past year, recently outsourced its verification process to Kroll Factual Data. Kroll performs borrower vetting, and submits its findings to the bank via a Web connection that integrates with the institution's automated underwriting engine (Kroll is integrated with more than 120 AU systems)-giving the bank independent "disinterested" verification on each borrower.
"If a lender gets into a situation where there's a significant backlog of loans on their desk, it can be tough for processors to complete loans in time," says Nanette Leonard, svp of business development at Kroll Factual Data in Loveland, CO.
Kent Samples, president of the mortgage division at Frontier, says the bank has hired Kroll to fully vet borrowers before closing, a move designed to mollify regulators and attract secondary market investors still nervous from the days when "undervetting" and post-closing audits were rampant in the origination market. "If we didn't do this vetting before closing, we wouldn't be able to sell to sell these loans in the secondary market," Samples says.
Kroll's checks on borrowers include investigations of the ability to pay monthly mortgage payments based on property rental histories, reviews of a borrower's personal assets, investigations of prior mortgage payment history, verifying whether a name and Social Security number on applications match those in the Social Security Administration records, verifying that a borrower's tax data is accurate and ensuring employment and salary history are credible.
This information has long been part of underwriting, but lenders, particularly smaller lenders, don't have the human capital or the time to perform many of these individual checks-some of which still have to be done manually.
"Staffing up for refis isn't a long-term solution," Samples says. "We can ebb and flow in our workload by outsourcing verifications. If I close 1,000 loans this month or 200 next month, I can accommodate those loans without being over or understaffed."
Market observers say it's too soon to know the full financial impact that outsourcing a larger component of risk management may have on overall lending volumes or secondary market pricing. And while the practice mitigates some risks, it also creates risks.
"Having control over the vetting is a big factor here for banks. The banks that [outsource] are putting a lot of faith in other companies," says Christine Barry, research director at Aite Group. "There's a risk of not doing something yourself that goes with outsourcing."
Both The Work Number and Kroll say they have policies in place in which they assume responsibility for the accuracy of borrower vetting.
Focardi says one option for community banks is to vet the outsourcer beforehand, and to monitor the work and conduct spot checks to maintain a level of control.