What is UDM? Why Does it Matter? Tools to Help Detect the Blind Spot

Insights

What is UDM? Why Does it Matter? Tools to Help Detect the Blind Spot

June 24, 2022
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Certified Credit

As a mortgage lender, you take many steps to ensure your applicants meet your eligibility requirements. You may offer prequalification, pull tri-merge credit reports, and verify applicants’ income and employment. Once you’ve evaluated your applicants’ creditworthiness, you can approve their applications and begin originating their loans.

However, the job of qualifying your borrowers doesn’t stop after that initial credit pull. Some mortgage applicants incur undisclosed debt during the “quiet period,” which is the time that takes place between the initial credit pull and loan closing. Catching this undisclosed debt is crucial if you want to avoid costly fallout and repurchase demands.

Undisclosed debt monitoring (UDM) is a tool you can use to combat the risks of undisclosed debt. Below, we’ll break down what UDM is and why it matters.

What is Undisclosed Debt Monitoring?

UDM is a service that monitors your borrowers’ credit activity continuously during the quiet period. It can alert you if your borrowers’ credit reports receive any new:

    • Tradelines
    • Credit inquiries
    • Balance changes
    • Late payments
    • Collection items
    • Debt-to-income ratio (DTI) increases

When you’re alerted to these types of changes, you can re-evaluate your borrowers’ eligibility on the spot, rather than remaining in the dark until closing.

Why Do Borrowers Take on Undisclosed Debt?

Many mortgage applicants are unaware of the implications of undisclosed debt. As a result, they may apply for other forms of credit and increase their debt during the quiet period.

For example, a borrower may charge all of the furniture for their new home on a credit card, unknowingly increasing their DTI ratio above the acceptable range.

Undisclosed Debt By the Numbers

So, how common are these types of events?

Here are a few statistics provided by Equifax that shed light on the prevalence of undisclosed debt:

      • Around 25% of monitored mortgage applicants incur a new tradeline during the quiet period.
      • 36% of borrowers who open these tradelines increase their DTI ratio by three percent or more.[i]
      • 22% of new tradelines are reported within ten days of closing.
      • 5% of borrowers apply for a car loan during the quiet period.

Why Does UDM Matter?

Now that you understand UDM, you may be wondering why it’s so important.

Ensuring your borrowers remain within certain DTI limits is critical for the following reasons:

#1 Undisclosed Debt May Impact a Borrower’s Ability to Repay Their Loan

The overarching purpose of credit reporting is to make sure people can afford to repay their debt.

If someone takes on too much debt at once, they may be more inclined to fall behind on their payments. Thus, undisclosed debt can turn an otherwise qualified borrower into a risky one. Lending to borrowers who incur undisclosed debt can put them in a precarious financial position.

#2 Undisclosed Debt May Inhibit Your Ability to Sell Loans on the Secondary Market

Since undisclosed debt may reduce a borrower’s ability to repay their mortgage on time, it also has implications for investors and government-sponsored enterprises (GSEs), like Fannie Mae and Freddie Mac.

Selling your loans to these buyers on the secondary market enables you to free up your capital to originate more loans and expand your mortgage lending business. However, buyers may not want your loans if you fail to catch undisclosed debt prior to closing.

Here’s how undisclosed debt can modify your secondary mortgage market participation:

      • GSEs – Fannie Mae and Freddie Mac have strict regulations for the loans they buy. For example, Fannie Mae requires lenders to re-underwrite loans if a borrower’s DTI ratio increases by three percent or more during the quiet period.[ii]
      • Investors – Investors are equally concerned with borrowers’ creditworthiness. After all, they want to realize the returns on their investments. If you sell a loan to an investor, they could request to have it reviewed for quality control. If they discover that undisclosed debt was incurred during the quiet period, you may have to contend with costly repurchase demands.

Having UDM in place can help GSEs and investors feel more confident in the quality of your loans. As a result, UDM can enhance your ability to sell on the secondary market successfully.

#3 Undisclosed Debt Can Increase Your Risk of Fallout

After putting so much hard work into originating a mortgage, fallout can be frustrating and expensive. Unfortunately, failing to catch undisclosed debt in a timely manner can increase your risk of experiencing it. That’s because undisclosed debt may nullify a borrower’s eligibility. If so, you may have to cancel their loan prior to closing.

#4 Undisclosed Debt May Indicate Mortgage Fraud

In many cases, borrowers incur undisclosed debt without realizing its negative implications. However, undisclosed debt can indicate something more nefarious: mortgage fraud. According to Equifax, 23% of fraudulent mortgage applications have misrepresented liabilities.[iii]

Protect Your Mortgage Lending Business with Cascade UDM

Having a reliable UDM service in place, like Cascade UDM, is the best way to safeguard your mortgage lending business against the risks of undisclosed debt.

What is Cascade UDM?

Cascade UDM is an innovative UDM solution provided by Certified Credit. Cascade UDM can monitor your borrowers’ credit reports continuously from the time of your first credit pull through closing.

To use Cascade UDM, all you have to do is provide your list of borrowers to Certified Credit. After that, we can ensure that their credit reports are monitored at all times for up to 120 days. When changes are uncovered, you’ll be alerted within 24 hours. You can receive your alerts via SMS/text, email, or through API to your loan origination system (LOS).

As you focus your attention on borrowers who require second reviews, you can enhance your efficiency and streamline your workflows.

What are the Benefits of Cascade UDM?

Cascade UDM has many advantages, including:

      • 24-hour alerts – Cascade UDM can keep you updated on your borrowers’ credit status on a daily basis, eliminating the blind spots that can lead to fallout, repurchase requests, and last-minute loan term changes.
      • Easy integration – Adding Cascade UDM to your originating process is a breeze, thanks to our seamless integration. When using an API, all of your UDM data is automatically populated within your LOS, enabling you to keep track of alerts with ease.
      • Customization – Cascade UDM enables you to customize how you receive alerts, whether you prefer texts, emails, or LOS notifications. You can also decide when to turn off monitoring. For instance, some lenders may choose to stop monitoring a few days before closing.
      • Improved LQI compliance – As we discussed earlier, Fannie Mae requires lenders to review their borrowers’ credit right before closing. Cascade UDM automatically helps you adhere to these Loan Quality Initiative (LQI) requirements by proving that your borrowers didn’t accumulate any additional debt during the quiet period. As a result, Cascade UDM eliminates the need to pull a refresh report, which could result in closing delays, unexpected pricing adjustments, or worst, loan approval termination. Other notable LQI requirements include:
        • Pulling two credit reports for each mortgage transaction
        • Performing verifications for borrowers’ occupancy plans for the property
        • Verifying borrowers’ Social Security numbers and Individual Taxpayer Identification numbers
      • Automation – After you send your list of borrowers to our team at Certified Credit, the rest of the monitoring process will be totally automated for you, allowing you to focus your attention on other areas of your lending business.

Are There Any Alternatives to UDM?

If you don’t use UDM, you can review your borrowers’ creditworthiness using a refresh credit report. These credit reports allow you to confirm your borrowers’ creditworthiness right before closing.

However, refresh credit reports don’t provide continuous credit monitoring. If you rely solely on these reports, you could still face surprises at the end of your loan origination process. In turn, you may have to scramble to re-underwrite loans last minute, placing a burden on your underwriting team and disrupting your sales pipeline. Your customers may also feel dissatisfied with your service, especially if you didn’t warn them about the dangers of undisclosed debt ahead of time.

For these reasons, UDM is a superior tool to ensure your borrowers’ credit is in good standing upon closing.

Educate Your Borrowers on Undisclosed Debt

Another way to discourage undisclosed debt is to explain to your borrowers how it may impact their loan eligibility early on in the lending process.

Many consumers don’t realize that undisclosed debt can affect their mortgage’s interest rate or even terminate their mortgage altogether. Rather than letting them find out the hard way, give your borrowers a helpful heads up. These discussions could prevent eager homebuyers from maxing out their credit cards on new furniture and harming their eligibility upon closing.

Certified Credit: Cascade UDM, Affordable Refresh Credit Reports, and More

As you can see, UDM is a worthwhile addition to any mortgage lender’s origination process. Here at Certified Credit, our Cascade UDM solution can protect you from the risks of undisclosed debt once and for all.

Cascade UDM is just one of our helpful mortgage lending solutions. We also provide:

    • Affordable credit reports
    • Automated lead generation tools
    • Automated prequalification
    • Automated verification of income and employment
    • Credit score improvement tools
    • Fraud and risk support
    • Settlement services
    • Money-saving strategies

If you want to experience the many benefits of UDM for yourself, sign up for a Cascade UDM demo. You can also schedule a credit consultation with Certified Credit to learn about our full suite of services.

Are you ready to streamline your mortgage lending business? Reach out to our team today.

 

Sources

[i]Equifax. Undisclosed Debt: The Mortgage Blind Spot.

https://www.equifax.com/business/blog/-/insight/article/undisclosed-debt-monitoring/

[ii] Fannie Mae. What is required if additional debt or reduced income is discovered after the underwriting decision?

https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-6-Liability-Assessment/1084043241/What-is-required-if-additional-debt-or-reduced-income-is-discovered-after-the-underwriting-decision.htm

[iii] Equifax. Undisclosed Debt: The Mortgage Blind Spot.

https://www.equifax.com/business/blog/-/insight/article/undisclosed-debt-monitoring/