Module 1: Introduction
AUS stands for Automated Underwriting System. An Automated Underwriting System is a computer-based program used by mortgage lenders to assess the creditworthiness and risk associated with a mortgage loan application. It helps lenders determine whether to approve or deny a loan, as well as what terms and conditions should be applied to the loan.
Risk analysis is considered the backbone of mortgage lending:
The lender is deciding whether to give a sizeable loan to the applicant.
The lender will make an informed decision based on the risk in the loan.
By looking at how loans have performed in the past, lenders are able to identify factors that appear to increase or decrease the risk in a particular loan.
The primary purpose of an AUS is to streamline and automate the loan underwriting process, which traditionally involved manual analysis of various documents and credit reports. By utilizing advanced algorithms and decision-making models, automated underwriting systems analyse vast amounts of financial data and borrower information to provide an objective evaluation of the loan application.
Here's how an AUS typically works:
Data Input: Loan officers or processors enter the borrower's information, such as employment history, income, assets, liabilities, and other relevant details into the AUS. The system may also request information directly from credit bureaus and other data providers to verify and supplement the provided data.
Credit Evaluation: The AUS analyses the borrower's credit report, considering factors like payment history, outstanding debts, credit utilization, and credit inquiries. It determines the borrower's creditworthiness by assigning a credit risk score.
Income and Debt Analysis: The AUS evaluates the borrower's income and debt-to-income ratio (DTI) to assess their ability to repay the loan. It compares the borrower's monthly income against their recurring debts, such as credit card payments, auto loans, and other outstanding loans.
Collateral Assessment: If the loan is for purchasing a property, the AUS assesses the property's value and compares it to the loan amount. This evaluation helps determine the loan-to-value ratio (LTV), which affects the loan's risk profile.
Risk Assessment: Using its algorithms, the AUS combines credit evaluation, income analysis, debt analysis, and collateral assessment to calculate an overall risk assessment for the loan application. Based on predefined criteria set by the lender, the AUS determines whether the loan is approved, denied, or requires further review.
Decision and Loan Terms: If the loan is approved, the AUS provides specific loan terms, such as the interest rate, loan amount, down payment requirement, and any conditions or additional documentation needed. These terms may vary based on the borrower's creditworthiness, income, and other factors.
While AUSs provide an initial decision and suggested terms, the final loan approval is still subject to human review, especially for complex loan scenarios or cases that don't meet standard criteria. However, AUSs significantly expedite the underwriting process by automating the analysis of routine loan applications, reducing the time and effort required for manual reviews.
An important point about the information used in the AUS evaluation—the systems can only work if the information entered is:
Accurate
Truthful
Complete
Supportable
Below are several common examples of Automated Underwriting Systems (AUSs) that are widely used in the mortgage industry.
Desktop Underwriter (DU): Desktop Underwriter is an AUS developed by Fannie Mae, one of the largest government-sponsored enterprises in the United States. DU is widely used by mortgage lenders to evaluate conventional mortgage loan applications. It analyses borrower data, credit reports, and collateral information to provide lenders with an underwriting recommendation.
Loan Product Advisor (LPA): Loan Product Advisor is utilized by Freddie Mac, another prominent government-sponsored enterprise. LPA assesses the creditworthiness of borrowers and provides risk assessment and underwriting recommendations for conventional mortgage loans. It helps lenders make informed decisions based on comprehensive analyses of borrower data.
FHA TOTAL Scorecard: The FHA TOTAL Scorecard is an AUS specific to loans insured by the Federal Housing Administration (FHA). It evaluates borrower credit profiles, income, and debt information to determine eligibility for FHA-insured loans. The TOTAL Scorecard provides feedback on the loan's risk and suggests appropriate loan terms.
VA Loan Electronic Reporting Interface (VALERI): VALERI is an AUS used by the Department of Veterans Affairs (VA) for underwriting and servicing VA-guaranteed loans. It helps lenders determine eligibility, evaluate borrower credit, and determine appropriate loan terms according to VA guidelines.
GUS (Guaranteed Underwriting System): GUS is an AUS used by the United States Department of Agriculture (USDA) for evaluating mortgage loan applications that fall under the USDA loan programs. It assesses borrower eligibility, creditworthiness, and property eligibility based on USDA guidelines.
To learn how to run AUS, go to Encompass: How to run AUS.