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Monitoring Undisclosed Debt to Avoid Costly Exposure to Risk

by Don Effertz

In today’s lending landscape of strict regulation and increasing requirements, monitoring borrower activity has become an important part of the loan origination process. Continuous monitoring will mitigate the risk associated with changes and additions to both input loan data and updates furnished by data providers as the loan progresses from application to closing.

Experience has proven there is no one solution that can completely address or identify all potential changes in a borrower’s information and the associated risk. However, monitoring changes in a borrower’s credit and loan file can alert lenders when the applicant has changed their debt-to-income ratio, or even help identify potential fraud. Mortgage fraud is a threat to everyone in the mortgage industry from financial institutions to mortgage applicants and even government entities.

Because mortgage fraud has such far-reaching consequences, quality control and risk mitigation are of critical importance to all lending institutions. Creating a clear and robust monitoring program and leveraging tools and technology to implement those programs are fundamental steps to identifying and preventing risk and potential fraud. To determine definitively at each step of the loan process how borrower and loan information has changed is crucial to streamlining processes and ensuring compliance. Leveraging available technology to help track risk issue management is a dependable way to create policies that work.

The primary purpose of any mortgage loan quality initiative is to ensure the lender has accounted for all risk related to the borrower and the property to be secured by the loan. To create a policy that encompasses all compliance concerns, lending institutions should track and continually monitor any changes to key risk areas during origination. Risk management begins with the mortgage application. Verifying borrower name, address, and personal information, as well as property information at the time of application will give loans a secure foundation and avoid costly mistakes down the road. Any discrepancies should be checked or corrected and database findings refreshed throughout the loan process to confirm accuracy and monitor changes.

Undisclosed Debt Monitoring

Risk mitigation procedures should also consistently check and monitor undisclosed debt. Debt monitoring identifies new credit inquiries and accounts, account status changes, balance changes, delinquency, and collections. According to a 2013 industry study, 20 percent of mortgage loans reviewed1 had one or more new trade lines between application and closing. Although lenders go to great lengths to ensure that applicants understand the risks in bringing on new debt, many borrowers continue to make and finance purchases that can jeopardize the loan. Strong monitoring tools are paramount in detecting and alerting lenders to changes and should have the ability to update and refresh as the loan progresses. Automated monitoring tools can greatly reduce errors and time spent on checking undisclosed debt through a manual process.

Another important variable that should be closely monitored is property and real estate information. Mortgage Electronic Regulation System (MERS) reports and new property record updates should identify potential undisclosed real estate owned by the borrower or new data that may impact the comparables in an appraisal report. It is important to remember that RV, mobile home, home equity, and home equity line of credit loans can be evaluated with a single in-file credit report and that these loans can appear on a credit report during the creditor’s reporting cycle with the repositories 30-90 days after a loan closes. Borrowers can also purchase a property for cash, or they could be responsible for unrecorded loans between two individuals, or an individual and a corporation. Continuous oversight of these more difficult to identify items will help reduce risk involved with an item that may appear while the loan is already in process.

Watch lists and natural disaster monitoring can be challenging but equally important to include in a loan quality initiative. Lender specific and government watch lists, and updates to those lists can help identify new or additional participants to the loan transaction. FEMA monitoring can identify disasters that may have occurred after application date but prior to closing that could potentially affect property values, insurance requirements, and other critical components.


Monitoring Technology

The mortgage industry is constantly evolving and new, more efficient tools for monitoring loan quality are becoming available to help guide lenders and policy creators through the complicated regulatory process. Leveraging available technology can be a differentiator when it comes to confirming compliance and streamlining processes for maximum efficiency.

To certify that all loan variables are consistently refreshed and verified, some lenders must manage a daily data file, manually review any alerts provided by the monitoring service, and compare the information to the borrower’s initial credit report to determine the alert’s impact. They must also account for any changes in or additions to the many additional variables contributing to loan quality.

When lenders employ a comprehensive risk mitigation system, automated alerts compare and identify changes in a borrower’s credit offered by one of the three national credit repositories and the impact of new, corrected, or changed loan data, watch list updates, MERS information, public record updates, MLS and property listing updates, FEMA disaster updates, and the borrower’s address activity.

A best practice to consider when designing a risk management policy is to identify and react to risk concerns as they appear. As new information is gathered and items on the applicant’s loan change, each responsible party should address the item and clear it before moving to the next step. A study conducted by DataVerify on 332,732 loan applications revealed an average of 2.85 data changes occurred per application during the loan origination period2, revealing the vital importance of constant monitoring.

The information associated with a borrower’s application is as dynamic and subject to change as the information contained in a credit report. It is important to account for changes in borrower information and the data sources associated with the borrower throughout the origination process to ensure all potential risk is considered before closing a loan.


Don Effertz
Don Effertz

Don Effertz is Vice President of Fraud Risk Management at DataVerify where he manages a team of seasoned mortgage and fraud professionals who are responsible for assisting with client product understanding, training, customization and product enhancement.  He can be reached at Don.Effertz@DataVerify.com.



  1. Equifax. Risk Reveal by the Numbers. Equifax White Paper, 2013.
  2. DataVerify. Addressing Risk Associated With Loan Application Data Changes. DataVerify White Paper, 2016.
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