Saturday, November 15, 2025

Unfreezing U.S. Housing Finance: How Two Simple Product Fixes at Fannie and Freddie Could Unlock Affordability

For nearly a century, the U.S. mortgage system has excelled at one thing: mass‑producing a single, homogeneous product—the fully amortizing, fixed‑rate mortgage underwritten to a wage‑earner’s debt‑to‑income (DTI) ratio. That “post‑Depression” design stabilized a shaky market and became the world’s benchmark. But today’s households and neighborhoods don’t look like they did in 1938. We live with roommates, rent out accessory units, work from home, and stitch incomes from multiple sources. When the financing toolkit refuses to see those realities, it doesn’t just miss nuance—it warps incentives, funnels capital into narrow property types, and suppresses affordability.

The good news: we don’t have to force price controls or wait years for new supply. In a moment of regulatory openness, Fannie Mae and its younger cousin, Freddie Mac, can make targeted adjustments to their product menus that widen the doorway to ownership and increase rental supply—without compromising safety and soundness.

Where today’s rules block affordability

1) The system discounts household cash flow from boarders/roommates and ADUs

GSE rules do allow limited credit for boarder or accessory dwelling unit (ADU) income—but almost entirely by adding a slice of that income to the borrower’s denominator (qualifying income), rather than offsetting the numerator (the monthly payment). For example, Fannie Mae’s HomeReady® policy permits boarder income to contribute up to 30% of total qualifying income (with documentation), and ADU rent is recognized with a vacancy haircut, typically 75% of lease in illustrative scenarios. Both are added to income and then tested against a DTI cap, rather than netting them against the mortgage payment. Fannie Mae+2Fannie Mae+2

Freddie Mac likewise allows ADU income on a 1‑unit primary residence under defined conditions, again as qualifying income subject to Guide requirements—not as a direct payment offset. Freddie Mac+1

Why does this matter mechanically? Adding income is the weakest way to recognize rent, as it scales with the DTI cap. Suppose a borrower earns $6,000/month, carries $300/month in other debt, and considers taking in a boarder paying $800/month.

  • Current “income‑add” method (assume a 40% total DTI cap): capacity increases by 0.40 × $800 = $320.

  • “Payment‑offset” method with a prudent haircut (use 75% of rent, consistent with how the GSEs treat ADU rent in examples): capacity increases by $600.

That’s ~1.9× more effective at a 40% DTI—and 1.5× to 2.3× more effective across common DTI caps (50% down to 33%). In plain terms: the same boarder can safely support a meaningfully larger mortgage when their rent reduces the payment instead of being dribbled into income. (The 75% haircut mirrors how GSEs already account for vacancy/loss on ADU rents today.) Fannie Mae

Reducing net mortgage payment is vastly more effective for affordability 

DTI Cap Baseline (No Boarder) With Boarder – Income‑Add With Boarder – Payment‑Offset Increase vs Baseline – Income‑Add Increase vs Baseline – Payment‑Offset Offset vs Income‑Add – Effectiveness
33% $1,680 $1,944 $2,280 $264 $600 2.27×
38% $1,980 $2,284 $2,580 $304 $600 1.97×
40% $2,100 $2,420 $2,700 $320 $600 1.88×
45% $2,400 $2,760 $3,000 $360 $600 1.67×
50% $2,700 $3,100 $3,300 $400 $600 1.50×

Impact on affordability - Maximum Housing Prices increases dramatically

DTI Cap No Boarder With Boarder – Income‑Add With Boarder – Payment‑Offset Extra Loan from Boarder – Income‑Add Extra Loan from Boarder – Payment‑Offset Effectiveness (Offset ÷ Income‑Add)
33% $272,853 $315,729 $370,300 $42,877 $97,447 2.27×
38% $321,576 $370,950 $419,024 $49,373 $97,447 1.97×
40% $341,066 $393,038 $438,513 $51,972 $97,447 1.88×
45% $389,789 $448,258 $487,237 $58,468 $97,447 1.67×
50% $438,513 $503,478 $535,960 $64,965 $97,447 1.50×

This is exactly how banks underwrite commercial and small‑income property: cash‑flow first. We already trust property‑level cash flows in DSCR underwriting for investments; we simply refuse to apply the same logic for owner‑occupied homes with modest, verifiable rent streams.

2) Property‑type rules nudge capital away from mixed‑use neighborhoods

Fannie’s mixed‑use eligibility keeps properties primarily residential, requires the borrower to be the owner‑operator of any business use, and values the property on its residential characteristics—effectively sidelining the commercial value that gives many “shopkeeper” buildings their economic logic. For condos and co‑ops, project rules generally cap non‑residential space at 35%. These constraints make above‑store apartments, live‑work buildings, and main‑street assets harder to finance in the single‑family channel, even when that is the natural housing near jobs and services. Selling Guide+2Selling Guide+2

The result: households often must finance a home and a nearby workspace separately (if at all). That fragments neighborhoods, lengthens commutes, and undercuts small‑business viability—the opposite of affordability.

Two product fixes that would move the needle fast

A) Net eligible rent against the payment (a “Residential Cash‑Flow” adjustment)

What to change: When a borrower can document stable boarder/roommate or ADU income under existing verification standards, allow that income—after standard haircuts (e.g., 25% for vacancy/loss)—to offset the monthly PITI before testing DTI.

Why it’s safe:

  • The haircut already embeds a cushion (the same logic GSEs use for ADU rent in examples). Fannie Mae

  • Require 12 months of history (or DU/LP‑approved alternatives such as verified recurring deposits), a simple lease, and market‑rent support (Form 1007 for rooms/ADUs as applicable). Selling Guide

  • Cap the net‑rent offset to a prudent share of PITI (e.g., ≤60%) and require two months’ “vacancy reserves” when relying on offsets above a threshold.

What it unlocks:

  • Using the $6,000 income / $800 boarder example: with today’s income‑add method, a borrower at a 40% cap qualifies for roughly $2,420 of PITI; netting rent would support about $2,700—a meaningful boost in competitive markets.

  • Multiply that across millions of roommates and ADUs, and you expand ownership and add immediate rental capacity (the boarder’s room). No subsidies required.

B) A true “Shopkeeper” or “Mixed‑Use Lite” mortgage

What to change: Offer a standard single‑family execution for one‑ to two‑unit properties with a modest ground‑floor commercial space (or live‑work layout), without forcing the borrower to be the business operator or stripping out commercial value in the appraisal. Keep existing zoning‑compliance and habitability tests; set clear commercial‑area and use thresholds; let the business rent offset payment under the same cash‑flow rules.

Why it’s safe:

  • Fannie already purchases mixed‑use that is primarily residential, with legal use and careful appraisal; condos and co‑ops already manage the share of commercial space at the project level. Adjusting eligibility and valuation to recognize modest commercial value—rather than pretend it doesn’t exist—aligns risk with reality. Selling Guide+2Selling Guide+2

  • Freddie’s ADU and property‑eligibility framework shows how accessory income and use can be governed within the single‑family guide. A parallel “Mixed‑Use Lite” construct is administratively feasible. Freddie Mac+1

What it unlocks:

  • Shopkeepers, restaurateurs, and repair tradespeople can live near work, eliminating a second lease and transportation costs.

  • Neighborhoods gain housing above storefronts—the most walkable, employment‑adjacent stock we can add without new land.

Implementation playbook (no statute needed)

  1. Underwriting guides & AUS updates

    • Add a “Net Eligible Rent” field in DU/LP that subtracts from PITI before DTI is calculated (with haircuts and caps).

    • Maintain today’s boarder/ADU documentation standards (e.g., 9–12 months history for boarders; market‑rent support; primary‑residence restrictions; DU/LP documentation). Fannie Mae+1

  2. Data & model governance

    • Begin with pilot pools (e.g., up to a defined UPB) to measure default/loss differences versus matched controls.

    • Track payment‑shock, vacancy incidence, and prepay behavior for loans using payment offsets.

  3. Risk rails

    • Haircut rents (e.g., 25%) and cap offsets as a share of PITI.

    • Require two months of vacancy reserves for high‑offset cases.

    • Apply modest loan‑level price adjustments (LLPAs) until performance data accumulate.

  4. Property eligibility tweaks

    • Define “Mixed‑Use Lite”: e.g., max commercial area 20%–25% of gross building area; clearly permissible uses; residential safety/egress intact.

    • Remove the owner‑operator requirement for the commercial space on one‑ to two‑unit properties when third‑party tenant leases and market‑rent support are provided; continue to require legal use/zoning. (Fannie’s current rule requires owner‑operator and “primarily residential” treatment; the tweak would let neighborhoods function as communities, not silos.) Selling Guide

  5. Appraisal modernization

    • Permit dual‑track valuation (residential comp set + light‑commercial rent/value addendum) so the actual blended use is reflected—something the mixed‑use appraisal guidance already gestures toward but doesn’t fully enable. Selling Guide

Answering the usual objections

  • “This just hides risk.” It doesn’t. Offsetting with a haircut is more conservative than pretending the rent doesn’t reduce the bill. It aligns with how GSEs already model ADU rent in examples (75% of lease) and with how income property is underwritten broadly. Fannie Mae

  • “Fraud and roommate churn will spike.” That’s what documentation and reserves are for. The boarder policy already requires history and shared‑residency documentation. Extending those same standards to a payment‑offset approach, adding verified deposits/receipts and a small vacancy reserve, manages churn risk. Fannie Mae

  • “Mixed‑use belongs in multifamily or commercial.” Not when we’re talking about one‑ and two‑unit shopkeeper buildings—ubiquitous in older urban grids. The GSEs already touch mixed‑use; aligning eligibility and valuation with real cash flows simply stops penalizing neighborhoods that co‑locate homes and jobs. Selling Guide+1

Why this beats heavy‑handed market interventions

Forcing nominal price cuts or waiting on large‑scale greenfield supply pushes the problem down the road. The two changes above:

  • Increase demand‑side capacity where the household already has a paying roommate or ADU.

  • Increase supply—immediately—by validating rooms/ADUs and shopkeeper apartments as part of the housing stock.

  • Reduce commute costs and labor frictions by letting people live near their storefronts and workshops.

And because these are product changes, not subsidies, they scale through the secondary market with standard risk management and capital treatment.

A system built for the 1930s can be modernized in 2025

We don’t need to abandon the 30‑year fixed mortgage. We need to stop underwriting 21st‑century households as if every home is a suburban box occupied by a single wage earner. Let’s do what the GSEs already know how to do in other corners of their guides:

  • Underwrite cash flow where it’s durable and verifiable.

  • Acknowledge mixed use where it’s legal and market‑accepted.

Fannie Mae and Freddie Mac can catalyze affordability right now by (1) netting prudent, documented rent against the payment and (2) offering a standardized “Mixed‑Use Lite / Shopkeeper” mortgage. Those two simple changes would widen access to ownership, expand rental options, and rebuild communities as places where living and working belong together.

Key sources: Fannie Mae’s Selling Guide and HomeReady materials on boarder and ADU income; Fannie Mae’s mixed‑use and project‑level rules; Freddie Mac’s ADU guidance and fact sheet. Freddie Mac+7Fannie Mae+7Selling Guide+7

Appendix: What the current rules say (select highlights)

  • Boarder/roommate income: Fannie Mae (HomeReady) allows it to contribute up to 30% of qualifying income with documentation (e.g., 9 of the past 12 months and proof of shared residency). Fannie Mae

  • ADU rental income: Fannie Mae explicitly allows ADU income on a 1‑unit primary with conditions, and illustrative scenarios apply a 25% vacancy haircut (75% of lease). Selling Guide+1

  • Freddie Mac ADUs: Freddie permits ADU income to qualify on a 1‑unit primary residence subject to Guide 5306; see Freddie’s ADU fact sheet. Freddie Mac+1

  • Mixed‑use eligibility: Fannie Mae requires mixed‑use properties to be primarily residential, with the borrower as owner‑operator of the business use, and appraisals to value the residential characteristics. Selling Guide+1

  • Commercial share limits (condos/co‑ops): Projects are generally limited to ≤35% commercial/mixed‑use space. Selling Guide

These are solid, safety‑oriented rules. The proposal here keeps the guardrails—while finally aligning underwriting with how Americans actually live, earn, and house each other.

Monday, October 20, 2025

Hiring, Onboarding - How to for the Mortgage Business

Hiring & Onboarding Workflow 

Scope: This reflects the hiring and onboarding procedures as contained in your manuals and forms. All placeholders from the earlier draft have been replaced with the correct taxonomy and form IDs from your FORMS list. 


A. Common Hiring & Onboarding Flow (All Roles)

Day 0 (Pre‑Offer)

  1. Requisition approved and job description finalized
    Manual location: 7‑25 Employment and Compensation Practice
    Forms/tools: FORM 7‑26‑1 OPS COMP New Hire Checklist.docx (initiated for requisition)

  2. Candidate screening, interviews & reference checks
    Manual location: 7‑25 Employment and Compensation Practices; 7‑26 Checking Background – Credit, Background and Housing Agencies
    Forms/tools: FORM 2‑72‑1 New Hire Reference Check.docx

Day 1 (Conditional Offer)
3. Offer letter issued
Manual location: 7‑25 Employment and Compensation Practices
Forms/tools: FORM 7‑26‑1 OPS COMP New Hire Checklist.docx (section for Offer of Employment)

  1. Background checks completed (credit, criminal, housing agencies as role‑specific)
    Manual location: 7‑26 Background Checks
    Forms/tools: FORM 2‑72‑1 New Hire Reference Check.docx (supplemented by vendor background reports)

Day 1‑3 (Pre‑Start Provisioning)
5. IT account provisioning & device assignment (least privilege, MFA, encryption)
Manual location: 2‑90‑23 Controlled Access by Job Duty; 2‑90‑24 Password Security; 2‑90‑25 IT Device Security
Forms/tools: FORM 2‑90‑21 IT Security Inventory.xlsx; FORM 2‑94‑1 Remote Work Setup and Annual Review Checklist.xlsx (for remote staff)

  1. Training assignment (initial role‑based training)
    Manual location: 2‑72 Mandatory Non‑NMLS Annual Training (new hire training rubric); 7‑45 Employee Training Calendar
    Forms/tools: FORM 2‑72 Mandatory Non‑NMLS Annual Training Rubric.xlsx; TRAIN 1‑70 BSA, AML and SAR Employee Training 2023.ppt

Day 1 (Start Date)
7. New‑hire orientation; policy acknowledgements (Code of Conduct, IT, AML/Red Flags)
Manual location: 7‑A Employee Handbook (General Employment Policy, Conduct, Drug‑Free Workplace, Harassment); 2‑93 Red Flag Plan
Forms/tools: FORM 1‑70 AML Red Flags Checklist.docx; Policy acknowledgement section of FORM 7‑26‑1 OPS COMP New Hire Checklist.docx

  1. System access validated by manager
    Manual location: 2‑90‑23 Controlled Access by Job Duty
    Forms/tools: FORM 2‑90‑21 IT Security Inventory.xlsx

Day 1‑30 (Post‑Start)
9. Complete required initial trainings (AML, OFAC, Red Flags, Fair Lending, Privacy, InfoSec)
Manual location: 2‑72 Training Policy; 7‑45 Training Calendar
Forms/tools: FORM 2‑72 Mandatory Non‑NMLS Annual Training Rubric.xlsx; FORM 1‑70‑1 AML‑BSA Self Audit Checklist.xlsx (QC validation)

  1. IT security validation: encryption, patching, AV, MFA enforced
    Manual location: 2‑90‑24 Password Security; 2‑90‑25 IT Device Security; 2‑90‑26 Patch Management
    Forms/tools: FORM 2‑90‑21 IT Security Inventory.xlsx

  2. 30‑day performance & compliance review
    Manual location: 7‑30 Performance Reviews; 7‑02.3 Performance Reviews
    Forms/tools: FORM 7‑26‑1 OPS COMP New Hire Checklist.docx (completion sign‑off); Performance Appraisal.pdf


B. Role‑Specific Add‑Ons

Mortgage Loan Originators (MLOs)

  1. SAFE Act license/registration & NMLS sponsorship verified
    Manual location: 2‑71 Compensation & SAFE Act Compliance
    Forms/tools: FORM 2‑71‑2 LO Comp Plan Commissions Individual.docx; FORM 3‑39 Loan Originator Employment Agreement.doc

  2. NMLS ID disclosure in advertising & signatures
    Manual location: 2‑30 Consumer Advertising; 2‑71 SAFE Act Advertising IDs
    Forms/tools: FORM 3‑21 ORIG COMPL Advertising and Website Review Checklist.xlsx

Processors

  • LOS/PII access controls
    Manual location: 4‑0 Processing Module; 2‑90‑23 Controlled Access
    Forms/tools: FORM 4‑01 PROC Loan File Set Up Checklist.xlsx

Underwriters

  • Appraiser Independence compliance
    Manual location: 2‑73 Appraiser Independence; 5‑0 Underwriting
    Forms/tools: FORM 2‑73‑4 Reconsideration of Appraised Value.pdf

Closers/Funders

  • Wire/escrow verification & closing QC
    Manual location: 6‑0 Closing Module; 2‑90‑22 Physical Office Security (escrow document controls
    Forms/tools: FORM 6‑2 CLOS QC Pre‑Closing Document Prep Funding Review.docx; FORM 6‑5 CLOS PROC Closing Notification Tickler.doc

Operations/Admin

  • Records retention & access
    Manual location: 2‑90‑50 Document Retention & Destruction; 7‑0 Operations
    Forms/tools: FORM 2‑90 Document Retention Reference.gdoc; FORM 7‑10 Employee Roster.xls


C. Timelines Summary

  • Pre‑offer: requisition, references, background checks (7‑25, 7‑26, FORM 2‑72‑1).

  • Pre‑start: IT provisioning (2‑90‑23/24/25, FORM 2‑90‑21); training assignment (2‑72, FORM 2‑72 rubric).

  • Start Day: orientation & policy acknowledgements (7‑A, FORM 7‑26‑1).

  • Within 30 days: required trainings complete (2‑72, 7‑45, FORM 2‑72 rubric); 30‑day review (7‑30, FORM Performance Appraisal).


D. Hiring & Onboarding Rubric (Manual Citations & Forms)

Role Procedure Step Manual Location Form(s) Notes
All Requisition & job description 7‑25 Employment & Compensation FORM 7‑26‑1 OPS COMP New Hire Checklist Covers posting/approval
All Background/reference checks 7‑26 Background Checks FORM 2‑72‑1 New Hire Reference Check Includes credit & housing
All Offer letter 7‑25 FORM 7‑26‑1 OPS COMP New Hire Checklist Offer embedded in checklist
All IT provisioning 2‑90‑23/24/25 FORM 2‑90‑21 IT Security Inventory; FORM 2‑94‑1 Remote Work Setup Checklist Device & access setup
All Training assignment 2‑72; 7‑45 FORM 2‑72 Training Rubric Role‑based, includes AML/OFAC
All Policy acknowledgements 7‑A; 2‑93 Red Flags FORM 1‑70 AML Red Flags Checklist; FORM 7‑26‑1 New Hire Checklist Includes handbook policies
All Performance/60‑day review 7‑30; 7‑02.3 Handbook Performance Appraisal.pdf 60‑day review built into handbook
MLO SAFE Act licensing 2‑71 FORM 2‑71‑2 LO Comp Plan; FORM 3‑39 Employment Agreement Must be complete before origination
MLO NMLS ID in ads 2‑30; 2‑71 FORM 3‑21 Ad & Website Review Checklist
Processor File/LOS PII access 4‑0; 2‑90‑23 FORM 4‑01 Loan File Setup Checklist Secure handling
Underwriter Appraiser Independence 2‑73; 5‑0 FORM 2‑73‑4 Reconsideration of Appraised Value
Closer Wire/escrow verification 6‑0; 2‑90‑22 FORM 6‑2 Pre‑Closing Checklist; FORM 6‑5 Notification Tickler
Ops/Admin Records retention 2‑90‑50; 7‑0 FORM 2‑90 Document Retention Ref.; FORM 7‑10 Employee Roster

E. Forms Index (Corrected for Hiring/Onboarding)

  • FORM 7‑26‑1 OPS COMP New Hire Checklist.docx → Section 7‑26 (Background & Hiring)

  • FORM 2‑72‑1 New Hire Reference Check.docx → Section 7‑26 (used with Training)

  • FORM 7‑10 Employee Roster.xls → Section 7‑28/7‑29 Personnel Records

  • FORM 2‑90‑21 IT Security Inventory.xlsx → Section 2‑90‑25 Device Security

  • FORM 2‑94‑1 Remote Work Setup Checklist.xlsx → Section 2‑94 Remote Access

  • FORM 2‑71‑2 LO Comp Plan docs → Section 2‑71 SAFE Act/Compensation

  • FORM 3‑39 Loan Originator Employment Agreement.doc → Section 2‑71 SAFE Act/MLO

  • FORM 3‑21 ORIG COMPL Advertising & Website Review Checklist.xlsx → Section 2‑30 Advertising

  • FORM 2‑73‑4 Reconsideration of Appraised Value.docx → Section 2‑73 Appraiser Independence

  • FORM 6‑2 CLOS QC Pre‑Closing Checklist.docx → Section 6‑0 Closing

  • FORM 6‑5 CLOS PROC Closing Notification Tickler.doc → Section 6‑0 Closing



Friday, August 29, 2025

Mortgages on Mars

When humans settle on Mars, the real estate and mortgage industry will emerge, albeit with some significant differences compared to Earth. Here’s how it might look:

Land Ownership

  • No Deeds Under Current Law: Under the 1967 Outer Space Treaty, no nation (and by extension, no company or person) can “own” land on Mars. So early settlers couldn’t technically buy and sell parcels the way we do on Earth.

  • Workaround Models: Ownership might be framed as long-term leases, licenses, or “use rights” issued by a governing Mars Authority or corporate colony operator.

  • Corporate Real Estate: In practice, companies that build habitats may “rent” living space like apartment landlords, bundling utilities, oxygen, and life-support.

Types of Properties

  • Habitats: Pressurized living pods, underground lava tube communities, or domed cities. Location will matter (sunlight, radiation protection, proximity to resources like ice).

  • Greenhouses & Industrial Modules: Valuable commercial “properties” because whoever controls food, oxygen, and water recycling has leverage.

  • Prestige Real Estate: Picture luxury domes with Earth views through digital windows, “oceanfront” simulations, or private rovers and tunnels.

Mortgages & Financing

  • Collateral Problem: On Earth, lenders can repossess property. On Mars, if someone defaults, what do you do — kick them out of the oxygen dome? Risky!

  • Corporate-Sponsored Housing: More likely than traditional mortgages. Employers may house colonists as part of work contracts, similar to mining towns.

  • Insurance-Linked Loans: If mortgages exist, they’ll be tied to risk pools (life support, radiation protection). A “Martian Mortgage” may look like a bundled financing + insurance + survival plan.

Mars Closing Disclosure Sample



Regulation & Compliance

  • Martian Housing Authority: A local governing body would emerge to assign rights, enforce building codes (airlocks that must work), and set safety standards.

  • Earth-Based Oversight: Until Mars is self-governing, real estate deals may be regulated by Earth governments, corporations, or international consortia.

  • Disputes: Imagine foreclosure court on Mars — but the nearest judge is a 20-minute light-speed delay away.

Market Dynamics

  • Scarcity Premium: At first, housing will be ultra-limited, so prices (or lease rates) skyrocket.

  • Speculation Bubbles: Earth investors will still try to sell “Martian plots” (like they already do online), but only those tied to actual habitats will matter.

  • Secondary Market: Once settlements stabilize, sub-leasing, space-sharing (like Airbnb for pods), and even vacation homes for Earth tourists could develop.

Mortgage Broker Role

  • Less “Rate Shopping,” More “Survival Packages”: Brokers may help colonists choose between bundled housing + food + oxygen packages from different providers.

  • Risk Underwriting: Instead of FICO scores, lenders will assess mission role, skillset (engineers > influencers), and life expectancy in Mars conditions.

  • Expat Financing: Earth-based lenders could offer loans payable in Earth currency, backed by colonist labor contracts rather than Martian collateral.

Enterprise-Wide Risk Assessments for Small Mortgage Companies

Small mortgage companies face the same regulatory expectations as larger institutions when it comes to identifying and managing risk. Even with one or two branches and fewer than fifty employees, regulators expect management to conduct an enterprise-wide risk assessment (EWRA) that evaluates exposures across operations, compliance, cybersecurity, and customer interactions. The EWRA provides a structured approach to documenting where risks exist, how they are controlled, and how frequently those controls are reviewed.

Risk Assessment Framework

The EWRA matrix organizes risks into categories, assigns an initial rating, lists the existing mitigation measures, records the residual rating, identifies the responsible party, and determines the review frequency.

We provide a tool to conduct your Risk Assessment internally. The idea is a four-step process: 1.) Identify Risk 2.) Risk Level (low, medium, or high) 3.) Where and how the risk is mitigated (e.g. policies/audits) and 4.) Post-mitigation risk.



  • Advertising – Online or remote application gateways

    • Initial Risk: Medium

    • Mitigation: Advertising compliance checklist; social media policy review

    • Residual Risk: Low

    • Responsibility: Compliance Officer

    • Review: 12 months

  • Advertising – Non-compliant advertising or social media use

    • Initial Risk: Medium

    • Mitigation: Advertising audit and officer oversight

    • Residual Risk: Low

    • Responsibility: Marketing Manager, reviewed by Compliance Officer

    • Review: 12 months

  • Compliance – Failure to comply with published regulations

    • Initial Risk: High

    • Mitigation: Regulatory Compliance Management System, documented policies and procedures

    • Residual Risk: Low

    • Responsibility: Compliance Officer / Management

    • Review: 12 months

  • Cyber-Security – Customer data exposure

    • Initial Risk: High

    • Mitigation: Red Flags Identity Theft program, written safeguarding policies, IT security plan

    • Residual Risk: Medium

    • Responsibility: IT Administrator or designated third-party vendor, overseen by Management

    • Review: 12 months

  • Fair Lending – Credit decisioning risk

    • Initial Risk: Medium

    • Mitigation: Fair Lending Plan with monitoring and comparative file review

    • Residual Risk: Low

    • Responsibility: Underwriting Manager / Compliance Officer

    • Review: Annual

Responsibility for the EWRA

Responsibility for the risk assessment rests with management. In small companies without a board of directors, the owner, managing broker, or designated compliance officer typically prepares the matrix and maintains the record. Regulators expect management to review and approve the EWRA annually and when major changes occur, such as opening a branch or introducing a new loan product. Companies may hire a third party to conduct or validate the assessment, but if they follow the structured process outlined in Form 1-80, they can complete the EWRA internally without outside assistance.

Application for Small Companies

A small mortgage company must demonstrate that it applies this framework proportionately to its size.

  • Policies such as the QC Plan, Compliance Manual, and IT Security Plan serve as the mitigation layer.

  • Risk ownership is documented directly in the matrix to show who is accountable for each item.

  • The EWRA is updated when products, vendors, or branch operations change.

  • Documentation is reviewed during examinations to confirm the company has a process to identify and mitigate risks.

States That Require Enterprise-Wide Risk Assessments

Several states have explicit or implied EWRA requirements tied to licensing examinations. Current examples include:

  • Texas – Department of Savings and Mortgage Lending (SML) requires annual EWRA documentation.

  • Washington – Department of Financial Institutions (DFI) cites EWRA in examinations.

  • South Carolina – Department of Consumer Affairs requires an IT-security-focused EWRA.

  • New York – Department of Financial Services (DFS) requires risk assessments as part of cybersecurity compliance.

  • Connecticut – Banking Department requests EWRA in mortgage company exams.

  • California – Department of Financial Protection and Innovation (DFPI) includes EWRA in compliance review requests.

  • Florida, Virginia, and Maryland – examiners frequently request EWRA documentation, even if it is not formally codified.

Next Steps - Conduct one NOW!

An EWRA is a core element of compliance for small mortgage companies. By documenting risks, mitigation, responsibilities, and review cycles in a structured matrix, the company demonstrates control of exposures across advertising, compliance, cybersecurity, and fair lending. Regulators expect to see this process in place, regardless of company size.

Friday, May 9, 2025

HMDA, ECOA and What's an Application?... again

Regulators do not understand Pre-Qualifications

Implications for NMLS Call Reporting and HMDA Reporting


Recent discussions make it apparent that regulators do not understand the concept of pre-qualification versus qualification or pre-approval. This is critical given the impending 2018 data recording season, when, with substantially lower reporting thresholds, even the smallest company becomes a potential HMDA reporter with its incumbent responsibilities and tasks.

Make sure you are armed with the facts when confronting a regulator who insists you are under-reporting your call volume or HMDA data.

What is Pre-Qualification?


"Pre"-Qualifying is a prior-to-application discussion of eligibility and rates, applied against published standard qualifying guidelines; ratios, down payment, loan type, and maybe even credit score. This analysis should result in a number; the maximum loan amount a customer could afford. It's not an application and the result states "THIS IS NOT AN UNDERWRITING DECISION", something that you must feature prominently on any correspondence. This is so consumers don't represent or think that they have been approved when they haven't.




If you Add a Property Address to a Pre-Qualification, the regulator will expect a Loan Estimate


Why Do Regulators Think Pre-Qualifications are Applications?


Buried in Reg B (ECOA/Fair Lending) commentary is a statement that has now become the lynchpin for the argument that pre-qualifications are applications. This opinion holds that pre-qualifications if failed, must be disposed of via Adverse Action and consequently are subject to activity reporting.

Comment for 1002.2(f)-3 When An Inquiry Or Prequalification Request Becomes An Application.
 3. When an inquiry or prequalification request becomes an application. A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under § 1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks. (See comment 9-5 for further discussion of prequalification requests; see comment 2(f)-5 for a discussion of preapproval requests.) 

This comment illustrates the conundrum because, in this case, the consumer doesn't have to ask (apply) for credit but rather simply be ineligible for financing (according to the comment); the discussion must be treated as an application and denied. It also belies the intent of the pre-qualification which is, by its very nature, a positive discussion of what is possible. Even if the current scenario yields a $500 loan, it's positive, not negative. You CAN offer someone a loan if the income increases by a prospective amount, decrease debts by some prospective amount, save some prospective amount of money, and then identify what the pre-qualification yields. This is the purpose of the pre-qualification discussion - educating the consumer about how he or she should proceed if trying to obtain financing in the future.

This also shows the other flaw in the logic of considering a failed pre-qualification a reportable event; what's the number? It's ZERO! Where do you report that?



A "Failed Pre-Qualification" Doesn't Actually Exist


If we agree with the regulator that declining to issue a pre-qualification is a declined loan, you should consider this instance a "Failed Pre-Qualification." A "Failed Pre-Qualification" doesn't mean you issued a pre-qual that didn't meet the customer's expectations - such as one where the customer was looking at a 500,000 house but could only afford 125,000 - but merely should reflect the result of the qualification calculation, subject to underwriting.  So if they can afford a $500 loan, you should issue a pre-qual for $500 and call it a day - no reporting required. In theory, you should never have a failed pre-qualification under this structure.

Your pre-qualification process must show you are determining a maximum loan amount, not meeting a specific loan request criteria. Once you begin trying to meet a specific criteria, it's no longer a pre-qualification , but a qualification. 

Regulators are Correct About Pre-Approvals and Qualifying


Logically, the regulatory interpretation of pre-qualification activity WOULD be true if we called the process "qualification," eliminating the "pre-," instead. In a qualification exercise you start with a specific number - a desired property or particular loan amount - and work through the prospect's financial profile to determine whether the customer is eligible for that particular number. Results of this process identify, in binary form - YES/NO - whether the prospect can afford or is eligible for that number. In this case, if the borrower has too many debts, or has insufficient income or cash, or because of the limited profile, the credit score is insufficient for this particular instance, you now have a number that you are not eligible for. Either change the number (counter offer) or decline to proceed (adverse action).

Similarly, a Pre-Approval is a loan commitment resulting from a customer's application for a specific amount of financing prior to property selection. A customer submits an application and all supporting documentation which the lender completely processes in the absence of a property - no sales contract and subject to appraisal, title and property conditions. All decisioning rules apply.  If the amount the borrower requests cannot be approved, then the underwriter may counter-offer for different terms, which the customer may accept. If not accepted, the loan must be declined and notices provided. Disclosures, except those which apply to a property, must also be provided.

You Can't Fight City Hall


Sadly, to this date, logic doesn't necessarily dissuade regulators from attempting to corral these innocuous discussions into a regulated process. According to several state regulators and the NMLS, while you don't count pre-qualifications in your call report, you must report declined pre-qualifications.

The golden rule applies. No amount of good reasoning will persuade a regulator, who has made a public determination about a policy, to admit that he or she is incorrect. So if you are in a state where the industry has allowed the regulator to control the definitions of what construes a credit inquiry, then you have to build policies around it, to ensure you comply.

Building a Compliant Pre-Qualification Process


Since this ECOA interpretation can open your business to regulatory scrutiny, you should build a process that inoculates you against under-reporting or fair lending findings. Simply, you could issue a pre-qualification certificate or letter for every single discussion, even if the result included a prospective versus current solution.


  • Generate and retain a copy of all pre-qualification letters/certificates from every discussion.
    •  Create a standard pre-qualification letter or certificate
      • There may be multiple formats
        • as is or
        • prospective
  • If you do not issue a pre-qualification (a failed pre-qualification) you should issue an adverse notice stating "we don't offer any program matching your requirements."  
A defined pre-qualification identifies a potential maximum, but does not state any basis for a declination.