In a tough purchase market where every deal counts, undisclosed debt can create significant financial risks for mortgage lenders, including late-in-the-process denials and potentially expensive repurchase demands from investors.
When a borrower fails to disclose recent debt – whether it’s a new credit card, auto loan, or other big-ticket item purchased on credit, their debt-to-income ratio can change, impacting their ability to get a mortgage. If this debt is caught too late in the process it can cause a lender to completely reconfigure a deal to get the required DTI for the loan or kill the deal altogether—after the lender has incurred a significant amount of cost structuring the loan.
On the other hand, if the debt is not caught before closing, it can be the cause for an expensive buyback which can create a significant loss when the loan has to be repurchased and then sold on the scratch-and-dent market. Last year, for example, lenders were reporting losses as high as $300,000 per loan on buybacks, many of which were caused by undisclosed debt.
Record Levels of Debt
American consumer debt is currently at all-time highs, according to the latest data from the Federal Reserve Bank of New York (NYFRB). U.S. household debt reached $17.8 trillion as of Q2 2024, and consumers are continuing to borrow and buy. In June 2024 alone, home equity lines of credit (HELOCs) surged by $4 billion; credit card balances increased by $27 billion, auto loan balances climbed by $10 billion, and mortgage balances jumped by $77 billion.
Meanwhile, the Commerce Department reports a 1% jump in retail sales from June to July of this year, with auto dealers, electronics and appliance stores, and grocery stores all seeing strong gains. The Fed’s recent half-a-point interest rate cut is set to boost confidence, making it cheaper to borrow money and encouraging more spending. Lower interest rates will also drive more refinancing, sometimes to consolidate homeowner debt. While this may be good for the economy, it also raises the risk of debt fraud, making undisclosed debt monitoring (UDM) even more crucial for mortgage lenders.
Alongside this record debt, alarming trends in delinquency rates are emerging. According to the NYFRB, aggregate delinquency rates held steady at 3.2% from the last quarter, but auto and credit card delinquency are still elevated. Even more concerning, the rates at which loans transition from one stage of delinquency to another have risen for credit cards, auto loans, and mortgages.
Combating Undisclosed Debt with FraudGuard®
The First American Data & Analytics FraudGuard solution has an optional UDM component specifically designed to combat the debt fraud issue. By integrating UDM within the FraudGuard tool, mortgage lenders can monitor borrower activity in real time during the loan approval process, identifying any new debts or liabilities that could affect loan terms or approval prior to closing. This allows underwriters to view and clear alerts up to closing, eliminating the need to re-pull credit reports at closing or perform side-by-side comparisons that can reduce productivity. Whether it’s intentional to commit fraud by not disclosing debt, or unintentionally neglecting to report a recently opened credit card or big-ticket purchase on credit, it’s vital for lenders to capture all debt before closing.
Enhancing usability, the UDM component provides customized configuration and reporting options to filter out unwanted debt types and inquiries, such as nominal buy-on-time purchases. It also allows for customized monetary thresholds and lending criteria tailored to individual lenders. With improved workflow and same-day activation, underwriters can achieve greater efficiency.
As the purchase market rebounds, mortgage lenders should brace for a surge in various fraud categories, such as occupancy fraud or falsified income, that can lead to expensive buyback demands. Our FraudGuard solution is equipped with specialized component integrations that can mitigate these additional fraud risks. Moreover, it features new automation capabilities that run these checks at specific milestones in the origination process. The automation seamlessly integrates with leading LOS providers, making it easy for lenders to improve their fraud monitoring with existing technology.
Implementing a UDM solution as part of the loan approval process allows lenders to save money, improve loan quality, and maintain compliance with GSE guidelines—ultimately protecting their bottom line. This proactive measure ensures that lenders can capture undisclosed debt before it's too late, reducing the risk of loan buybacks and maintaining profitability in an increasingly debt-ridden market.
For more information on undisclosed debt monitoring or the FraudGuard solution, visit our website.