As prices soar with growing inflation, consumer debt is on the rise. The average household currently owes $155,622 on loans and credit cards.[i] Housing prices are also increasing. The average mortgage loan size for a new home purchase in 2022 is up to $453,000.[ii]
Together, these shifts highlight an important issue within the mortgage lending process: undisclosed debt. Undisclosed debt is any debt that’s incurred during the “quiet period” of the loan origination process, which takes place between the first credit pull and closing.
In this article, we’ll explain how mortgage lenders can benefit from undisclosed debt monitoring (UDM). We’ll also answer some FAQs about UDM that we often receive from our mortgage lending clients.
What is Undisclosed Debt Monitoring (UDM)?
UDM is a credit monitoring service that tracks borrowers’ credit activity during the quiet period.
When you have UDM turned on, you can receive alerts when your borrowers experience changes in their credit activity that may impact your loan requirements, such as:
- New tradeline accounts
- New credit inquiries
- Changes in their balances
- Debt-to-income ratio increases
- Payment amount changes
- Late payments
- New collection items
When you’re alerted about these changes right away, you can address them promptly, rather than finding out about them unexpectedly before closing and facing costly fallouts.
Why is UDM So Important?
If you’re like many mortgage lenders, you may want to sell some of your loans to Fannie Mae and Freddie Mac. Doing so can free up your capital to extend more loans and grow your business.
Fannie Mae and Freddie Mac have strict standards for the loans they agree to purchase. While you may ensure that borrowers meet these loan requirements during your initial credit pulls, a lot can change within the quiet period.
Even slight changes in your borrowers’ credit activity or debt-to-income ratios could jeopardize closing and your loan’s eligibility on the secondary loan market.
A Look at the Numbers
Here are a few statistics that display the necessity of monitoring your borrowers’ undisclosed debt:[iii]
- According to Equifax, even a three percent increase in a borrower’s DTI ratio could result in expensive repurchase demands.
- 36% of borrowers who open a new tradeline during their quiet period increase their DTI ratio by this amount or more.
- 5% of borrowers apply for an auto loan during their mortgage loan’s quiet period.
- Undisclosed debt can indicate a higher risk of mortgage fraud—23% of fraudulent mortgage applications contain misrepresented liabilities.
As you can see, incurring additional debt in the quiet period is a relatively common occurrence. That’s because many borrowers don’t even know that it’s an issue.
For instance, an excited mortgage applicant may purchase new furniture on credit for their new home as they eagerly await their closing date, not realizing it may impact their rate or terminate their loan.
Be Upfront With Your Borrowers About Undisclosed Debt
You can reduce your risk of undisclosed debt issues by proactively educating your borrowers at the beginning of the lending process. Let them know that it’s not a good idea to take out additional debt during this time. Your transparency can save both of you a lot of time and trouble.
What Are the Potential Risks and Financial Impacts of Forgoing UDM?
Even if you educate your borrowers, you can’t assume that they’ll listen to your advice. You never know what your borrowers are doing behind the scenes. If a borrower misses a credit card payment or purchases a new car, you’ll be none the wiser until your final credit pull (about 3 days before closing). That’s why UDM is essential.
Without UDM in place, you could face expensive fallouts and forced buybacks. If this happens, the full financial responsibility of your loans will fall back on your shoulders, constraining your capital and ability to expand your business.
Discovering undisclosed debt right before closing can also:
- Disrupt your sales pipeline
- Place an undue burden on your underwriting team
- Harm your customer experience
- Bring down your bottom line
By keeping tabs on your borrowers’ credit activity, UDM reduces these risks.
6 Common Undisclosed Debt Monitoring FAQs
Now that we’ve explained why UDM is so important, let’s review some questions we frequently receive from our clients at Certified Credit.
1. How Many Credit Bureaus Does UDM Use?
Most mortgage lenders only monitor one credit bureau. Monitoring multiple credit bureaus is generally unnecessary. However, you can choose to monitor two or three credit bureaus if you want to.
2. How Long Does UDM Monitor a Borrower?
UDM typically monitors borrowers for 120 days. You can customize your monitoring timeline to better suit your loan origination process.
For instance, some lenders turn off UDM a couple of days before closing. Considering that 70% of undisclosed debt is incurred 14 days or more before closing,[iv] this is generally safe to do.
3. Does UDM Replace the Need to Pull a Refresh Credit Report?
Yes! UDM can eliminate the need to order refresh credit reports.
Refresh credit reports are another tool you can use to make sure your borrowers’ credit is still in good standing before closing. Refresh reports can only uncover problems at the very end of the loan origination process.
Both UDM and refresh reports can satisfy Fannie Mae and Freddie Mac’s LQI requirements. However, UDM offers the added benefit of uncovering potential issues with undisclosed debt in real-time.
4. What if a Borrower Doesn’t Incur Any Undisclosed Debt?
Many of your borrowers won’t take on additional debt during the quiet period. As a result, you won’t receive any alerts about changes in their credit activity.
So, how can you provide documentation about their good credit standing at the time of closing?
UDM tools generate monitoring summary reports. These reports can serve as proof that you monitored your borrowers, even if they didn’t receive any hits during the quiet period.
5. Can You Use Certified Credit’s UDM if You’ve Worked With Another Credit Reporting Agency?
If you’ve been working with another credit reporting agency (CRA), you may be wondering if you can partner with Certified Credit for your UDM needs. Absolutely! We’re happy to set you up with our UDM services, even if you currently work with another vendor partner or CRA.
6. Can You Customize Your UDM Notifications?
When UDM is turned on, you may want to customize how and when you receive alerts. Luckily, you can. With Certified Credit’s UDM solution, you can receive alerts immediately via email or through API. You can also select which borrowers you want to monitor.
What is Cascade UDM?
Here at Certified Credit, we’ve been working on an innovative UDM solution, known as Cascade UDM. Cascade UDM is a UDM monitoring tool that automates the monitoring of one or all of your borrowers’ credit activity and sends out credit activity alerts every 24 hours via email.
Cascade UDM also generates overview reports, which outline how many UDM alerts:
- Have been added recently
- Have been deactivated
- Are currently processing
Cascade UDM Benefits
Cascade UDM stands out from other UDM services due to its:
- Seamless integration – Cascade UDM’s data will automatically flow back to your loan origination system (LOS), streamlining your workflows and making the monitoring process that much more convenient.
- Customizable settings – With Cascade UDM, you can set specific underwriting standards and personalize when and how you receive your alerts. This customization allows Cascade UDM to support your business’ unique needs.
- Timely alert schedule – Since you’ll receive daily UDM alerts, you can address issues promptly and save yourself from untimely fallouts. You can also enjoy the peace of mind of knowing that your borrowers are being monitored continuously throughout the quiet period.
- Ease of use – Cascade UDM is very easy to use. We can walk you through its setup process step by step. After you send us your list of borrowers to monitor, there’s not much to do on your end. Cascade UDM will do all of the hard work for you behind the scenes.
- Enhanced compliance – Cascade UDM can improve your loans’ LQI compliance. As a result, you can adhere to secondary market loan quality standards with ease.
As you can see, Cascade UDM offers the ultimate undisclosed debt blind spot protection. Thanks to its many benefits, Cascade UDM can make your mortgage lending process more efficient, less time-consuming, and more streamlined.
Certified Credit: Cascade UDM, Affordable Credit Reports, and More
At Certified Credit, we have many exciting things happening this year. Our launch of Cascade UDM is just one of them.
In addition to Cascade UDM, we offer an extensive suite of mortgage lending solutions, including:
- Affordable credit reports
- Automated lead generation tools
- Automated prequalification
- Automated verification of income and employment (VOE)
- Credit score improvement tools
- Fraud and risk support
- Settlement services
- Money-saving strategies
Are you ready to streamline your workflows and supercharge your mortgage lending business? Reach out to our team to sign up for a Cascade UDM Demo or a credit consultation with Certified Credit today.
[i] CNBC. Amid rising prices, American families fall deeper in debt.
[ii] CNBC. The average size of a new mortgage just set a record, as home prices continue to climb.
[iii]Equifax. Undisclosed Debt: The Mortgage Blind Spot.
[iv]Fannie Mae. Undisclosed liabilities – attacking this common defect.