How to Prevent Loan Defects and Repurchase Demands With Automated VOE

Today’s mortgage lenders are grappling with significant challenges. Not only is the cost of origination on the rise, but the ever-present risk of Fannie Mae and Freddie Mac repurchase demands is adding to the pressure.

Fortunately, you can reduce your lending costs and mitigate your risk of repurchase demands by employing automated verifications of income and employment (VOE). Automation can significantly improve your VOE’s accuracy, efficiency, and cost-effectiveness.

Below, we’ll review the risks associated with loan defects, along with some fascinating findings from Fannie Mae’s 2024 Quality Insider Report. After that, we’ll explain what automated VOE is and how it can help prevent loan defects and save you money.

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What Are Risks Associated With Loan Defects?

A loan defect is any issue in a loan file that violates a secondary market buyer’s guidelines. Fannie Mae outlines its requirements in its Selling Guide and regularly reviews the loans it buys to ensure they meet its stringent standards at the time of delivery.

Read More: The Secondary Mortgage Market: How Can You Ensure Your Loans Meet Investor Requirements?

If one of the loans you sell to Fannie Mae has defects, such as underwriting errors, misrepresentations, or insufficient documentation, you may be forced to buy it back in as little as 30 to 60 days. Repurchasing a loan comes with costly consequences, including:

Paying for the loan – Repurchasing a loan you removed from your portfolio can place significant financial pressure on your business, especially if you don’t have sufficient capital on hand.
Additional costs – Along with buying back the loan, you may also need to pay legal fees and additional administrative costs.
Operational disruptions – Buying back a loan can be a time-consuming process. After allocating the administrative resources to repurchase the loan, you’ll also need to revamp your loan origination process to ensure you don’t make the same mistakes again.
Reputational damage – Frequent loan defects can damage your reputation in the secondary marketplace. After all, Fannie Mae’s repurchase requests are often made public. Consistently failing to meet secondary market standards can signal poor loan origination or underwriting practices to investors, brokers, and customers, making it that much harder to attract more business in the future.
Increased regulatory scrutiny – Lenders who have a pattern of buying back loans may draw more attention from regulators, from the Consumer Financial Protection Bureau (CFPB) to the Federal Reserve. These regulators may conduct more frequent audits of your underwriting practices or impose penalties for non-compliance.

As you can imagine, these costs can take a serious financial toll on your mortgage lending business, particularly in today’s tight lending market.

2024’s Leading Mortgage Loan Defects

If you want to protect your business against repurchase demands, it’s crucial to understand the most common types of loan defects. This way, you can proactively improve your underwriting process and reduce your chances of facing repurchase requests in the future.

Based on Fannie Mae’s evaluation of a random sampling of loans acquired in Q4 2023, the most significant loan defects are as follows:

Monthly payments not properly calculated
Base pay miscalculations
Rental income/expense miscalculations
Self-employment income miscalculations
Lack of borrower employment
Missing completion reports or 1004D alternatives
Lack of documentation for self-employed income
Bonus/commission/overtime pay miscalculations
Misrepresentations of primary occupancy
Missing gift documentation

As you can see, six of these top ten significant defects involve income and employment issues, and four center specifically on income miscalculations. This highlights how crucial it is to conduct accurate VOE during your underwriting process.

Here are a few more notable statistics from Fannie Mae’s report:

Around two-thirds of significant defects were for loans with initial debt-to-income ratios above 43%. This suggests that loans with higher DTIs require even more stringent verifications.
Around half of base pay miscalculations were associated with new employment. In other words, borrowers who recently started new jobs often had improper income calculations. Rather than looking at the current picture of an applicant’s employment, carefully review their year-over-year trends to assess their income’s predictability.
Many self-employed defects arise from using just one year of data, as opposed to Fannie Mae’s Desktop Underwriter’s requirement of two years. Thus, you want to make sure your applicants possess sufficient employment histories to qualify for their loans.

How to Prevent Loan Defects

If you want to limit loan defects and insulate yourself from their repurchase risk, there are many steps you can take. Some ideas include:

Providing comprehensive training to your underwriting, processing, and QC teams so they’re aware of the most common loan defects, how to spot them, and how to avoid them in the first place.
Requesting verbal verification of employment from your applicants to ensure they’re actively employed at the time of closing, particularly those who work in volatile industries.
Enacting detailed post-closing QC reviews to ensure you address any errors before delivering your loans to Fannie Mae, focusing the most on higher-risk loans, such as those with high DTIs.

Along with these steps, you can also make significant improvements to your VOE accuracy by leveraging an automated VOE solution, like Cascade VOE.

What is Automated VOE?

Since the introduction of the Dodd-Frank Wall Street and Consumer Protection Act in 2010, lenders have been required to “make a reasonable, good-faith determination of a consumer’s ability to repay a residential mortgage loan according to its terms.” Before the rise of automation, lenders primarily relied on manual processes to fulfill this requirement, such as calling their applicants’ employers or reviewing physical pay stubs and tax documents.

Unfortunately, manual VOE is slow, time-consuming, and error prone. Here are just a few ways that manual VOE leaves room for inaccuracies, misrepresentations, and mortgage fraud:

Your applicant’s employer accidentally provides incomplete or outdated information.
Your applicant’s employer mistakes them with another employee.
You transcribe their employer’s statements incorrectly over the phone.
Your applicant provides a fake employer’s contact information and coaches the imposter to provide false information.

With automated VOE, you don’t need to worry about these issues. That’s because automated VOE solutions quickly and accurately verify a borrower’s income and employment using reliable databases or payroll accounts. In turn, they eliminate the need for time-consuming phone calls and error-prone paperwork.

Read More: Automating Your VOE Strategy

What is Cascade VOE?

At Certified Credit, our automated VOE solution is called Cascade VOE. It integrates with many of the leading third-party, instant-hit VOE databases, including Experian Verify and The Work Number. It can also leverage popular consumer permission data (CPD) vendors, which allow applicants to share their bank or payroll account credentials with you securely.

Cascade VOE also employs an innovative rules-based engine and advanced cascade, which enables you to:

Select your preferred vendors, whether you want to use instant-hit, consumer permission, or a combination.
Arrange these vendors in your desired order.
Let Cascade VOE cycle through these vendors one by one until it returns a hit for an applicant.
Attend to other tasks while Cascade VOE operates behind the scenes.
Receive timely verification alerts via your preferred medium, whether that’s text, email, or LOS notification.

Thanks to the benefits we’ll explore below, lenders who employ Cascade VOE typically save an immediate 15% to 25% on their verification costs.

How Does Automated VOE Reduce Loan Defects?

Automated VOE can help you reduce loan defects by enhancing the accuracy of your verifications. After all, these solutions allow you to leverage some of the most robust employment records on the market, including those from:

Instant-hit providers – Experian Verify currently includes tens of millions of employment records, while The Work Number collects data from over 3.8 million employers. These instant-hit vendors have done the hard work on your behalf to ensure accurate verifications.
Consumer permission vendors – Similarly, CPD vendors can ensure data accuracy by connecting you directly to your applicants’ financial accounts, eliminating the potential for fraudulent documents or misleading employment information.

3 More Ways Automated VOE Can Cut Costs

Loan buybacks aren’t the only issue that can place undue financial pressure on your business. In light of rising loan origination costs, you may also be losing money on a daily basis due to inefficient VOE practices.

Luckily, automated VOE can help you cut costs in the following ways:

#1 Automated VOE Saves Time

Time is money – particularly when you have salaries to pay. By reducing the amount of time that your team spends on manual verifications, automated VOE can reduce your operational costs considerably.

Once your employees are freed from performing tasks that technology can do better and faster, they can focus their attention on value-added activities, such as:

Improving borrower relationships
Exploring new markets
Promoting timely cross-selling opportunities, such as HELOCs or refinances
Focusing on complex loans that require extra review
Training other employees on loan defect prevention
Honing your post-closing QC protocols

How Cascade VOE Can Maximize Your Savings

As a leading automated VOE solution, Cascade VOE often completes verifications in minutes. Expediting your verifications helps you enhance the efficiency of your lending pipeline, enabling you to take on more business over time.

As a Cascade VOE user, you’ll also enjoy access to Certified Credit’s manual VOE services. Our in-house team can complete manual verifications for any applicants that aren’t verified within Cascade VOE, allowing your staff to stay focused on what matters most – your borrowers and business outcomes.

Lastly, it’s important to note that Cascade VOE can integrate with your existing LOS or POS system. This seamless integration allows you to review your verification data from one place and avoid any data entry errors.

#2 Automated VOE Enhances Consistency

While each of your employees will conduct manual verifications slightly differently, automation will do them the same way every time. This standardization can help you pass on your VOE costs to your customers more effectively.

According to the TILA-RESPA Integrated Disclosure Rule (TRID), you must provide your borrowers with clear cost estimates early on in their lending process and honor these estimates upon closing. By making your VOE costs more predictable, automated VOE helps you calculate more accurate cost estimates than you could if your VOE costs varied wildly every time. In turn, you can recoup more of these costs upon closing and protect your bottom line.

#3 Automated VOE Allows You to Prioritize Low-Cost Vendors

VOE providers don’t charge the same fees, so the vendors you choose can significantly impact your overall costs. With Cascade VOE, we make it easy to leverage the lowest-cost vendors every time. All you need to do is:

Feature affordable vendors in your cascade – If affordability is your top priority, make sure to add some low-cost CPD vendors in your cascade.
Order your vendors according to their cost – Next, place your most affordable vendors at the top of your cascade. This way, Cascade VOE will exhaust these vendors before moving on to the pricier options on your list.

Another perk of Cascade VOE is that you only pay when it returns a hit. In contrast, if you use certain VOE vendors on your own, you may need to pay for every request, regardless of whether the vendor is able to verify the applicant’s information.

Automate Your VOE and Save With Certified Credit

As you can see, automated VOE can save you money in several ways. Along with preventing loan defects, it can save you time, standardize your VOE costs, and streamline your vendor expenses. Best of all, you can reap these benefits in a few clicks – you just need to employ Cascade VOE.

At Certified Credit, we partner with lenders of all sizes nationwide, giving us a deep understanding of the unique challenges they face in managing their operational costs. That’s why we’ve developed a comprehensive suite of cost-saving solutions.

Along with Cascade VOE, we also offer: