Underwriting is tough. Underwriters have a mountain of information to remember and apply correctly on each and every loan they touch. Straight memorization, or rote memorization, is what we learned in our school days with flash cards and spelling words. Through hours of practice and application we were able to move that information from our short-term memory to our long-term memory.
Short-term vs. Long-Term Memory
Research shows that rote memorization like flash cards is only effective for our short-term memory. In order to move something into our long-term memory, it must be utilized and linked to other experiences. Ref: https://eric.ed.gov/?id=EJ1161522
When you apply rote memory to the task of underwriting, you see why most underwriters don’t miss the basic items, they miss the rare and infrequent cases. Why? Because these scenarios aren’t practiced and the rote memory they had about that guideline soon faded as they didn’t see a loan like that for months or years.
Perfect Memory
If we could ensure all guidelines were followed on each and every loan, and no longer relied on human memory, what would that look like? First, human error rates for guidelines would go to zero. That would translate to lower costs and higher profits, but also higher throughput. No more lost time by staff debating guidelines in a buyback scenario.
Humans often fail to remember details and are generally better at remembering themes and concepts. By using software to manage the details of guideline compliance, that allows them to focus on the theme of underwriting, which is fundamentally risk analysis.
Automation Tools
Most people are familiar with one of the tax preparation software products on the market. Those companies have taken the complexity of the IRS tax code and turned it into a piece of software that applies the rules and makes the calculations for you. All you need to do is provide it with the raw data. Prior to these products being on the market, people would spend hours manually filling out their taxes and reading the IRS guidelines.
Now, millions of users trust this software to ensure their taxes are prepared correctly and are error free. Here is a newsflash, your accountant who does your taxes uses software too; they do not rely on their years of accounting experience to memorize tax code changes.
IncomeXpert did the same thing for the needs of the mortgage industry. Our users can provide IncomeXpert the raw data, and we ensure the calculations are done correctly and meet all agency guidelines.
How to Choose
If you are moving from hand calculations or even Excel spreadsheets to a software solution like IncomeXpert, there are three things you need to consider to ensure you are getting guideline compliant income:
- Check how guidelines are applied. Some guidelines are a clear yes/no, while others may have some allowable gray area. Make sure your solution can handle both types and advise you when you are in a possible gray area.
- Check if you get reps and warrants from the software. Check the fine print from your software vendor. Make sure you are getting reps and warrants for guideline compliance as well as calculation accuracy. Many vendors will confirm they correctly perform arithmetic calculations, but don’t come out and say they will be guideline compliant. If not, you might be left holding the recourse in a buyback situation.
- Check if the solution fits the needs of sales as well as operations. Sales needs to be able to determine a safe qualifying income to vet out potential borrowers. Operations needs the ability to adjust the calculations based on risk analysis and additional data. Both parties need to remain guideline compliant. Ensure your vendor can support the full lifecycle of the loan and all of the stakeholders along the way.
ACES Quality Management states that income accounts for 23% of all defects, and that trend has been on a downward trend over the last few quarters, but approximately half of the 23% were attributed to calculations, while the other half were attributed to income documentation. ACES noted the downward trend is mostly attributed to the income documentation, and income calculation remains a problem for the industry.
Summary
If you are still relying on human expertise and memory to ensure error free income in your loans, the statistics show that it is only a matter of time before those errors begin to cost you time and money. Software has been developed to relieve us from the burden of rote memory and improve our speed and accuracy. Modern tax preparation software illustrates this perfectly. But as with anything, there are details when making this transition to a software provider that must be considered.
If you are curious about what guidelines are most frequently missed, we have compiled a report on the topic. Using our 3 million loans as a baseline, we have reviewed what guideline errors clients make most frequently. The report runs through the top five and gives suggestions for how to avoid these in the future. If you want a copy of the report, click the link below and we can email that to you.