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Monitoring Undisclosed Debt

Q: As a lender, am I responsible for ensuring applicants have not taken on new debt from the time of underwriting approval up until the loan closes?

A: Yes, lenders are responsible for ensuring applicants have not taken on new debt, which may impact the applicant's ability to qualify for the loan, from the time of underwriting approval until loan closing. Continuous monitoring through the use of undisclosed debt monitoring or a soft credit refresh to check for new debts should mitigate undisclosed debt and identify any new debt obtained by the applicant prior to closing.

Ultimately, the lender is responsible for ensuring the applicant qualifies for the mortgage loan at the time of closing. Fannie Mae indicates that it "expects lenders to have in place processes to facilitate borrower disclosure of changes in financial circumstances throughout the origination process and prefunding quality control processes to increase the likelihood of discovering material undisclosed debts or reduced income." Fannie Mae Selling Guide B3-6-02: Debt-to-Income Ratios (7/25/2017).

Undisclosed debt or new debt obtained by an applicant could negatively impact debt-to-income ("DTI") ratios and could affect an applicant's loan qualification. As such, Fannie Mae advises lenders that they may need to re-underwrite a loan if an applicant reveals or a lender discovers additional debt after an underwriting decision has been made. Further, Fannie Mae requires lenders to re-underwrite a loan if the new information causes the DTI ratio to increase by 3 or more percentage points up to the maximum allowed. "Re-underwriting means that loan case files must be resubmitted to DU with updated information; and for manually underwritten loans, a comprehensive risk and eligibility assessment must be performed."

Additionally, in the event a loan goes delinquent or an investor selects a loan for quality control review, the investor may re-pull a borrower's credit and review liabilities to ensure that the lender included all debt at the time of loan closing in the qualifying ratios. If an investor identifies new debt during the "gap" period between loan approval and closing, the loan may be subject to repurchase.

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