Secondary market underwriting: Credit report analysis

The four C’s of underwriting (capacity, capital, collateral and credit) are fundamental in structuring a loan that is not only suitable for the customer, but also saleable in the secondary market.

Last year, we published Secondary market quality control appraisal review: Will yours stand up to investor scrutiny? to address collateral and Secondary market underwriting tips: Tell your story to address common sense (the fifth C). Now we’re talking about credit.

New credit score requirements

Changes are coming to the credit score requirements for loans sold to Fannie Mae and Freddie Mac. The Federal Housing Finance Agency released an announcement on October 24, 2022, regarding the validation and approval of FICO 10T and VantageScore 4.0 credit score models. These models are designed to improve accuracy, create more inclusive credit scores and enhance safety and soundness in the housing market.

Once implemented, lenders will be required to deliver both the FICO 10T and VantageScore 4.0 when selling a loan to either of the government-sponsored enterprises. Although, it’s anticipated that the transition will take multiple years to complete.

The new models will capture data such as rent, utility and telecommunications payments when available, resulting in more consumers with credit scores than in the past. This should improve borrowers’ access to credit.

In addition to the new credit-scoring models, Fannie Mae and Freddie Mac are working on a plan to change from a tri-merge credit report requirement to a bi-merge credit report requirement. This is expected to reduce costs without increasing risk to the government-sponsored enterprises — an important outcome, especially in today’s market conditions.

The credit decision process

The fundamentals of analyzing a borrower’s credit report and credit payment history remain critical when making your credit decision. When reviewing a borrower’s credit history, your underwriter should be able to see the pattern of how they’ve managed their finances over time and consider whether the borrower will be able to manage the new debt.

In addition, consideration should be given to what the proposed loan will add to the borrower’s credit profile.

An automated underwriting system (AUS) is an effective tool to use in your decision-making process, but the answer should be more than a simple approve or accept. It’s important to be mindful that the AUS is a tool, but not a decision-maker. When the story and the data don’t match up, it’s up to your underwriter to put the two together, effectively analyze the credit history and make an appropriate credit decision.

How Wipfli can help

At Wipfli, we work with our clients to build lasting relationships and create a positive impact. Our quality control team is comprised of seasoned lending professionals who come from different backgrounds and areas of expertise. They’re ready to provide guidance on best practices and help your organization achieve its goals.

Contact us today, so that we can help you be more confident in the integrity of your loans.

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• Secondary market underwriting tips: Tell your story
• Secondary market quality control procedures: Is your loan quality up to par?
• Secondary market quality control appraisal review: Will yours stand up to investor scrutiny?
• Don’t confuse your quality control review with a regulatory compliance audit