The reverse mortgage Financial Assessment has brought its share of new practices and procedures to originators who have long worked around the confines of a largely “no income, no credit,” product.
Originators have reported an adjustment to the new requirements, which was to be expected. But on the topic of credit, lenders have had to make some major adjustments in order to accommodate originators who have little experience with credit checks and analysis.
The rise of the “credit desk”
Major wholesalers are working with their originator partners by providing the service of “credit desks,” or platforms where originators can gain an initial assessment as to issues around prospective borrowers’ credit. The originator can then proceed on an informed basis rather than having to request the borrower’s credit report or face associated fees.
“The American Advisors Group (AAG) credit desk assists our wholesale partners in reviewing loan scenarios where the borrower has potential income or credit issues,” says Kim Smith, senior vice president, wholesale for AAG. “We work with our wholesale partners to understand the borrower’s scenario and discuss potential extenuating circumstances and compensating factors. Ultimately, we want to assist them as they process the file and, if necessary, advise them in situations where a Life Expectancy Set-Aside (LESA) or partial LESA may be required.”
In order to use AAG’s credit desk, a broker follows a pre-submission review process by submitting a request for either a “lite” or “full” review. A lite review requires minimal documentation and involves a basic financial assessment. It’s designed to give the broker feedback on the likelihood a prospective applicant will pass the full financial assessment requirements.
A full review is more comprehensive and requires full documentation both for credit and income.
Urban Financial of America (UFA) offers a similar service to its wholesale partners. At UFA, a “scenarios” desk serves as a pre-review of circumstances to see if the borrower is likely ineligible based on that initial information.
“Brokers like to save the borrower time if they won’t qualify upfront,” says Sherry Apanay, chief sales officer for UFA. “We see a lot of unique property appraisals, Powers of Attorney and doctor’s letters, trusts, etc.—any scenario a little outside of the ordinary where the broker isn’t sure if something will result in an approval issue.”
Working through credit inquiries
The credit desks to date have identified both specific application outliers as well as some common issues that have come up across the origination landscape.
“Working with our wholesale partners, many of the scenarios that cross the AAG service desk are fairly unique in nature; we haven’t come across a set of questions or issues that point to a common thread,” Smith says. “We work closely with our clients to assist them in recognizing and documenting compensating factors.”
Following the initial Financial Assessment rollout in April, originators reported many of these unique scenarios and suggested some tips for working through them: conducting a pre-interview, getting comfortable with the concept of a set-aside, asking all relevant questions and examining credit early, among other tips. The credit desks are an additional help for originators who find unusual situations throughout that initial process.
Preliminary findings from the credit desk
The credit desk can be helpful, but lenders are finding there are still misunderstandings about how credit is considered as a part of the Financial Assessment.
“There seems to be a general misunderstanding that the lender can decide to give a borrower with credit issues a partial LESA due to the circumstances. Originators don’t seem to understand that partial LESAs are for income shortfalls and full LESAs are for credit issues,” Apanay says. Further, she notes that compensating factors are for income shortfalls only—not for derogatory credit. In cases where there has been derogatory credit, the borrower must exhibit extenuating circumstances, she stresses.
“We haven’t seen many extenuating circumstance questions yet, but what we have seen haven’t appeared to be able to qualify as such,” she says.
Extenuating circumstances have been approached by originators as somewhat of a gray area to help qualify borrowers whose credit history alone doesn’t allow them to do so.
“One example was a couple with several medical events over the past few years, but they continued to take out numerous additional credit lines (i.e. incurring new debt) that would have contributed to their derogatory financial situation, thereby not qualifying them for an exception. Others have been reasons for the derogatory credit, but not actual extenuating circumstances i.e. the trade lines were cosigned for a child or parent who didn’t make the payments.”
AAG has also observed some misunderstandings among broker partners, but more so that they are quick to assume a loan won’t qualify when the credit desk finds it likely will.
“My number one observation about FA implementation in the wholesale channel is that we often see partners quickly assuming that a senior client is not able to qualify for a reverse mortgage, post-FA,” Smith says. “Our team has noticed many partners immediately thinking a ding on credit is a dead deal. That simply is not the case. I think as an industry we have to work together to train ourselves and our partners to recognize and document extenuating circumstances and compensating factors. This part is where we see the biggest learning curve and opportunity for improving how we work through the post-FA files.”
This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.
Written by Elizabeth Ecker