Ability-to-Repay ‘Era' Creates ‘Steering Wheel Lock' on Fraud Risk

Mike Sorohan msorohan@mba.org

June 05, 2018

First American Financial Corp., Santa Ana, Calif., released its monthly Loan Application Defect Index, noting the ancillary benefit of the ability-to-repay standards has been fewer loan application defects and a "steering wheel lock" on mortgage fraud risk.

The report said frequency of defects, fraudulence and misrepresentation in the information submitted in mortgage loan applications remained the same in April compared to March. From a year ago, the Defect Index increased by 1.2 percent. However, the the Defect Index is down by nearly 20 percent from the high point of risk in October 2013.

The report said the Defect Index for refinance transactions increased by 1.4 percent compared to March and is 7.6 percent higher than a year ago. The Defect Index for purchase transactions decreased by 2.2 percent compared to March but rose by 2.2 percent from a year ago.

"In January of 2013, the mortgage industry witnessed the birth of a new income-underwriting era," said First American Chief Economist Mark Fleming. "The Consumer Finance Protection Bureau published new requirements for mortgage lenders to carefully assess a consumer's ability to repay their mortgage loan. The ‘ability-to-repay' rules were intended to discourage the use of high-risk stated income loans that were common during the housing boom. The new rules also required lenders to strengthen the mortgage loan manufacturing and underwriting practices associated with the determination of a consumer's ability to repay."

Since the ability-to-repay rules were issued, Fleming said there has been a "precipitous and significant decline" in income-specific mortgage loan application misrepresentation, defect and fraud risk. Income-specific defect and fraud risk has continued to decline and is currently 70 percent below its peak prior to publication of the ability-to-repay rules.

"The ability-to-repay standards require mortgage lenders to make a reasonable and good faith determination of the consumer's ability to repay their mortgage. The rules have reduced the incentive to fraudulently misrepresent one's income, a benefit to lenders," Fleming said. "The ability-to-repay standards are essentially the mortgage fraud risk prevention equivalent of using a steering wheel lock to dissuade potential car thieves."

Additionally, Fleming noted to make the good faith determination, the mortgage industry enhanced the manufacturing and underwriting practices specific to the assessment of a consumer's income and ability to repay their mortgage. "This has helped to reduce income-related loan application defects," he said. "The intent of the ability-to-repay standards was to help consumers secure mortgages that they can reasonably expect to repay. The ancillary benefit has been fewer loan application defects, and a steering wheel lock on mortgage fraud risk."

The report said states with the greatest year-over-year increase in defect frequency in April were Arkansas (16.7 percent), Wyoming (13.5 percent), New Mexico (13.0 percent), Virginia (12.2 percent) and Maryland (10.8 percent). States with the greatest year-over-year decrease in defect frequency were South Carolina (-13.3 percent), Louisiana (-12.9 percent), Minnesota (-10.6 percent), Alabama (-10.0 percent) and Vermont (-9.6 percent).

Among the largest 50 metros, markets with the greatest year-over-year increase in defect frequency in April were Virginia Beach, Va. (24.7 percent), Los Angeles (18.5 percent), San Diego (17.9 percent), Orlando, Fla. (14.6 percent), and Oklahoma City (11.3 percent). Markets with the largest year-over-year decrease in defect frequency were Austin, Texas (-14.0 percent), Birmingham, Ala. (-13.8 percent), Raleigh, N.C. (-12.4 percent), Minneapolis (-11.9 percent), and New Orleans (-11.0 percent).

Share this article