What is a Credit Refresh & Why is it So Important? The Impact of Undisclosed Liabilities.

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What is a Credit Refresh & Why Is It So Important?

Many aspiring homeowners believe that they’re good to go once their initial mortgage application is approved. As a lender, you know that almost all mortgage programs require additional credit checks and closing day verifications to ensure borrowers still qualify at the time of closing.

After all, a lot can take place between the initial credit pull and closing. This period of time is often referred to as the “quiet period” because borrowers can quietly accrue more debt throughout it. Fortunately, credit refreshes can expose this new debt and bolster your loan quality initiative (LQI) standards.

So, what are credit refreshes? In this article, we’ll explain how these tools can safeguard lenders from the risks of undisclosed liabilities. We’ll also highlight some other solutions that can provide even more robust protection.

What is a Credit Refresh?

A credit refresh is a type of soft pull credit report that’s pulled within ten days of closing to ensure that a borrower still qualifies for their mortgage. For example, it can verify that the borrower’s debt-to-income ratio (DTI) is still within an acceptable range. It can also uncover any new:

Credit Inquiries
Tradelines
Payment increases
Missed payments
Collection items
Other negative marks

Borrowers that incur new debts during the quiet period may push their DTIs past their lenders’ eligibility requirements. According to Equifax, 36% of borrowers who opened a new tradeline during the quiet period saw their DTI increase by 3% or more.^[i] Such a notable increase in DTI may make a borrower ineligible for their current mortgage program or product.

Credit refreshes are also important for mortgage LQI. Many government-sponsored enterprises (GSEs) and investors require these additional measures before they will purchase a loan. They may also perform their own credit pull after purchase. Any undisclosed liabilities they find could lead to a repurchase demand.

At Certified Credit, our Refresh Reports can help you guarantee the quality of your loans so they meet secondary market guidelines.

Examples of Undisclosed Liabilities

According to Fannie Mae, undisclosed debts are “any loan or liability (e.g., auto, revolving, installment, mortgage, or lease) that exists at the time the borrower closes on the subject loan and is not disclosed by the borrower during origination.”^[ii]

Here are a few common examples of undisclosed debt:

- Auto loans – Sometimes, a borrower may purchase a new vehicle to go with their new home, not realizing it may negatively affect their mortgage eligibility. According to an analysis from Fannie Mae, 47% of undisclosed debt is for new vehicles.^[iii]
- Installment loans – Next, borrowers may take out other types of installment loans during the quiet period, such as personal loans or student loans. Like auto loans, these types of credit accounts have the potential to push their DTIs outside of their lenders’ requirements.

- Credit cards – Many borrowers start designing their new homes’ interiors as soon as their initial credit application is accepted. They may be eager to get new furniture, appliances, and decorations. When they shop for these items, they may be tempted to charge them on a credit card or open a new store credit card to take advantage of discounts. If these shopping sprees take place during the quiet period, they may put their mortgage eligibility at risk.
- Additional mortgage loans – 14% of borrowers incur undisclosed debt in the form of other mortgage loans.^[iv] For instance, a borrower financing a commercial property may assume that it doesn’t count as consumer debt, even though they guaranteed the loan personally. This misunderstanding may cause their residential mortgage to fall through.
- Unreported debt – New credit accounts may not show up on credit reports for up to 60 days.^[v] Thus, a borrower’s credit report at the time of their initial credit pull may be missing some information.Along the same lines, some debts never get reported to the credit bureaus, such as payday loans or buy-now-pay-later loans.^[vi] While these debts may not affect a borrower’s credit score, they can still impact their ability to make mortgage payments on time.
  Lastly, some borrowers may purposely omit certain debts from their credit application to improve their chances of getting approved.

The Risks of Undisclosed Liabilities

As mentioned before, it’s important to uncover undisclosed debt as soon as possible. If it goes unnoticed, there’s a possibility that your investors may issue a repurchase demand or your borrowers will no longer qualify for their loan program or product. Undisclosed liabilities can result in:

- Closing delays – Undisclosed debt discovered upon closing can delay your closing process significantly. For instance, you may need to recalculate your borrowers’ interest rate, payment amount, and loan term to account for the new credit data.

- Loan fallout – It’s also possible that a borrower’s undisclosed debt may make them ineligible for a mortgage altogether. In this situation, you’ll have to be the bearer of bad news. Not only will this conversation disappoint your borrower, but it may also negatively impact your referrals going forward.
- Repurchase demands – Along with changes to employment, undisclosed liabilities are one of the leading causes of repurchase demands. Having to buy back a loan that’s already been closed, funded, and sent to servicing can pose significant losses to your business.
- Loss of productivity – Whether undisclosed debt leads to a loan fallout or repurchase demand, your team will have to carve out time to deal with the situation. This can be quite stressful for everyone involved and reduce your company’s overall productivity.
- Overloaded underwriting resources – Last-minute undisclosed debt can place an undue burden on your underwriting team as they scramble to resolve the situation.

- Damaged investor relationships – Investors have strict underwriting requirements to protect their interests. If you repeatedly sell investors low-quality loans on the secondary mortgage market, you could damage your relationships with them and find it harder to make loan sales in the future.
- Negative customer experience – Since so many consumers incur undisclosed debt without realizing the risk, finding out that their loan terms have changed or they no longer qualify for a mortgage can be upsetting news. If you didn’t educate your borrowers about these risks ahead of time, they may blame you for the situation and report a negative customer experience.

Due to undisclosed liabilities’ risks, you should try to prevent them at all costs. Fortunately, you can do so quite easily if you take a proactive approach.

How to Prevent Loan Fallouts and Repurchase Demands

Here are a few steps you can take to protect your mortgage lending business from undisclosed liabilities:

#1 Educate Your Borrowers On Undisclosed Debt

The first step you can take to reduce undisclosed debt is to educate your borrowers about the risks of undisclosed debt early on in your lending process. Simply give your borrowers clear instructions on what they should and shouldn’t do during the quiet period.

For instance, you can tell them to:

- - Not apply for any new credit accounts.
  - Not wrack up large credit card balances.
  - Not miss any debt payments.
  - Disclose any debt payments that aren’t listed on their credit reports.
  - Update you on any notable changes to their financial situation.
  - Alert you to any changes in their employment status or payment structure.

#2 Review Your Borrowers’ Credit Reports With Them

Many borrowers don’t know how to read their credit reports. Thus, it’s a good idea to schedule an in-person meeting or video conference to go through their credit information with them.

Reviewing a borrower’s credit report line-by-line may bring to light inaccuracies. You can also use this opportunity to ask your borrowers if they have any active debts that aren’t yet listed on their credit reports.

#3 Employ Undisclosed Debt Monitoring (UDM)

Encouraging your borrowers to disclose new debts may be effective in some cases. While you should trust your borrowers, it’s also smart to verify their claims. You can keep a close eye on your borrowers’ credit reports throughout the origination process by employing a real-time credit monitoring solution, like Cascade UDM.

Cascade UDM monitors your borrowers’ credit reports for up to 120 days after their initial credit pulls. You can customize its monitoring timeline to suit your lending process. You can also set it up to monitor reports from one, two, or all three credit bureaus. If any problematic credit information is discovered, you’ll receive an alert within 24 hours, enabling you to address it with your borrower as soon as possible. In turn, this innovative solution can empower you to take a more proactive approach to undisclosed debt.

The best part? Cascade UDM is affordable. Despite providing you with invaluable protection, it won’t increase your loan manufacturing costs by much. And, any costs you incur can be passed onto your borrowers by bundling them into your closing costs.

#4 Order Credit Refresh Reports

Finally, you should always order a credit refresh report before closing. Even if you aren’t making the underwriting decision, you’re still liable for the information you provide to the funding lender. Thus, you want it to be as accurate and up-to-date as possible.

Ordering credit refreshes as a standard protocol can protect your business from repurchase demands and help you maintain strong relationships with your investors. You can think of your credit refresh as an insurance policy that ultimately lowers the cost of your originations by preventing repurchase demands.

While you can order a refresh report within ten days of closing, pulling it the day of will offer the greatest level of protection.

Certified Credit: Undisclosed Debt Monitoring, Credit Refreshes, and More

In summary, you don’t have to let undisclosed debt derail your lending pipeline. You can safeguard yourself, your investors, and your borrowers by employing the right tools. Credit refreshes and UDM, in particular, can ensure you originate sellable loans that support your long-term business growth.

Here at Certified Credit, we offer affordable Refresh Reports, in addition to Cascade UDM. These tools can enhance your mortgage LQI, complement your mortgage employment verification, and bolster your mortgage fraud prevention efforts. We also offer:

- Affordable tri-merge credit reports
- Automated borrower retention and lead generation tools
- Automated prequalification
- Automated verification of employment
- Credit score improvement tools
- Flood zone determinations
- Fraud and risk support
- Settlement services

Want to learn more about our offerings? Schedule a credit consultation with the Certified Credit team today.

Sources:

Equifax. Undisclosed Debt Monitoring.

https://www.equifax.com/resource/-/asset/infographic/undisclosed-debt-monitoring-infographic//

Fannie Mae. Undisclosed liabilities – attacking this common defect.

https://singlefamily.fanniemae.com/media/28021/display

Experian. Why a New Credit Card May Not Show on a Credit Report.

https://www.experian.com/blogs/ask-experian/why-is-my-new-credit-card-not-showing-on-my-credit-report/

Investopedia. Buy Now, Pay Later Services Not Reporting Payments.

https://www.investopedia.com/bnpl-services-not-reporting-payments-6751224

^[i] Equifax. Undisclosed Debt Monitoring.

https://www.equifax.com/resource/-/asset/infographic/undisclosed-debt-monitoring-infographic//