By JOE LIGHT
Collecting pay stubs for a home-mortgage application has been a time-honored tradition, barring a few ill-fated years running up to the financial crisis. But if changes announced by mortgage-finance company Fannie Mae catch on, that process could go the way of the dodo.
Fannie Mae on Monday said it would allow lenders to use employment and income information from a database maintained by credit bureau Equifax to verify borrowers’ ability to handle a loan, rather than relying on the traditional documentation process of collecting physical copies of pay stubs and tax data. The move is expected to make the mortgage process easier for borrowers and lenders alike.
Fannie announced other changes it said could broaden mortgage access for some borrowers. The mortgage giant will ease the lender process for granting loans to borrowers who don’t have a credit score, a key issue for advocates for certain minority groups that are less likely to have traditional credit histories. Likewise, Fannie in mid-2016 also will require lenders to begin collecting “trended” credit data from Equifax and TransUnion, which includes longer-term borrower credit histories.
Fannie Mae and competitor Freddie Mac don’t make loans. They buy them from lenders, wrap them into securities and provide guarantees to make lenders whole if the loans default.
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Mortgage lenders since the financial crisis have relied on government-backed programs for most loans, making Fannie’s and Freddie’s requirements especially important in deciding what borrowers are able to get a mortgage.
Certain minority groups have had an especially hard time getting loans in recent years, in part because those groups also tend to have lower incomes or less money for a down payment but also because they sometimes don’t have traditional credit histories.
In August, Fannie rolled out a new program that let lenders count income from nonborrowers within a household, such as extended family members, toward qualifying for a loan.
But for more than a year, some advocates and industry groups also have pushed the Federal Housing Finance Agency, which regulates Fannie and Freddie, to allow the companies to use alternative credit-score models that take into account utility or rent payments.
When seeing if a loan qualifies for backing by Fannie or Freddie, lenders usually put borrowers’ data into an automated system that tells them if a borrower qualifies. But applicants who don’t have a credit score calculated by Fair Isaac Corp. typically require the lender to determine their eligibility manually, a more time-intensive process that lenders also feel could open them up to liability issues down the line.
Fannie Mae officials on Monday said that in 2016 they would begin to allow lenders to evaluate borrowers without a score through the automated process. Borrowers that have a traditional score calculated by Fair Isaac will still need to meet the 620 minimum, on a scale of 300 to 850.
As for the trended credit data, for now, Fannie isn’t saying what it will be used for. The extended data will let Fannie see if borrowers, for example, are paying off their credit card bill every month or instead are making a minimum payment and letting their balances increase. In the future, a borrower making the full payment could be treated as the safer bet.
With the data, “you can do things like approve more customers or give customers better rates,” said Steve Chaouki, head of TransUnion’s financial services group.
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