The COVID-19 income verification roller coaster
With escalating unemployment, furloughs, wage reduction and an overall lack of certainty in respect to the U.S. job market, income and employment risk is at the height of volatility. What began as the absence of 4506-Ts for income verification, has evolved into the temporary elimination of representation and warrant relief and suspension of employment validation in Fannie Mae’s Desktop Underwriter® (DU®), as well as many other distinctions to income and employment eligibility under COVID-19 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Even though both of the Government-Sponsored Enterprises (GSEs) state that their COVID-19 policies stand outside of their respective guides and that existing disaster policies do not apply, mortgage originators must be sure to consider normal income guidelines for calculation and documentation of acceptable income and employment for qualifying purposes. GSE COVID-19 flexibilities do allow originators to exclude SBA Paycheck Protection Plan (PPP) loans in the qualifying debt-to-income (DTI) calculations for self-employed borrowers.Conversely, any loans that have been deferred or are in forbearance, such as student loans, must still be included in DTI calculations. This all makes for a roller coaster of nuanced guidance during this unparalleled pandemic environment.
Adding to the complexity of staying abreast of requirements, both of the GSEs took another jab at their COVID-19 requirements as of May 5, 2020.Fannie Mae released updated versions of their original two COVID-19 related Lender Letters, LL 2020-03 (originations) and LL 2020-04 (appraisals), as well as taking this opportunity to issue a FAQ. Freddie Mac previously released Bulletins 2020-05 and 2020-08 describing their COVID-19 requirements, which are highlighted in an earlier QMS blog. More recently Freddie Mac updated their guidance with the release of Bulletins 2020-11 and 2020-14, and issuance of an FAQ. The following are highlights of the related updates to income and employment:
Nearly all temporary COVID-19 policies/flexibilities, including quality control specific requirements, have been extended for application dates through June 30, 2020.
Temporary leave income requirements do not apply to income for borrowers furloughed or laid off due to COVID-19.
Only unemployment benefits tied to seasonal employment can be considered as qualifying income.
Standard guidelines based on the April 15 tax filing date have been adjusted in accordance with the July 15 filing extension date.
Third-party verification data must be valid for no more than 60 days from the date of the note.
The age of eligible income and asset documentation has been reduced from four to two months.
If paystubs and bank statements reflect any existence or possibility of a reduction in pay or employment change, originators must be exceedingly cautious in averaging, or even using, income to qualify borrowers.
Fannie Mae has temporarily suspended representation and warrant relief for employment verification and suspended employment validation in Desktop Underwriter® (DU®).
If Freddie Mac’s Loan Product Advisor® asset and income modeler (AIM) renders that a loan is eligible for income representation and warrant relief, then this decision stands as long as all purchase documentation complies.
Due to the unprecedented nature of the COVID-19 pandemic, even with ongoing guidance, it’s difficult to properly gauge the likelihood that a borrower will remain gainfully employed and if the associated business will remain open. The underlying message is that there is no amount of due diligence that is “too much” when it comes to verifying that income is stable and likely to continue.In instances where documentation evidences that income is declining, the corresponding income cannot be utilized until it stabilizes.For borrowers that have been furloughed or are on temporary leave, they must have returned to work and the originator must be able to appropriately document current income.
Keeping up with the volatility and complexity of COVID-19 income and employment guidance, for not just the GSEs but for all investors, necessitates a trusted, experienced quality control partner. Quality Mortgage Services is uniquely positioned to assist your organization in the identification, oversight, and reporting of compliance with Fannie Mae and Freddie Mac guidance.Let us help you mitigate the risk associated with doing business under COVID-19 flexibilities and the CARES Act, as well as avoid fines and repurchase risk. QMS is a veteran-owned quality control and audit technology solutions company, and a dedicated member of the Mortgage Bankers Association (MBA).We are committed to both the industry and our valued customer base in meeting the challenges of COVID-19.