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Lending, Mortgage, Open Banking

Open banking unlocks income verification data for lending

Whether it comes to buying homes and automobiles, seeking a personal or small business loan, or even approval to rent an apartment, there can be one daunting step of the loan process: income verification. 

It can take a long time. It involves a lot of paperwork—if the borrower has devoted the file cabinet space to store it. And without transparency or the right information, the process can feel arbitrary.

Open banking can help. Let’s start at the beginning.

Which Documents Usually Provide Verification of Income?

Paystubs, which are one of the most basic data sources, can provide proof of income as well as employment verification at the same time. With a paycheck traceable to an employer or a client, a lender can determine what kind of income the check represents and can follow up with its issuer. 

Other income documents include proof-of-income letters, the standard W-2 annual tax statement and other tax forms that may be more fragmented. These documents aren’t always readily available. While they can be obtained from payroll providers and tax filing software, that involves even more digging and delays for what should be a simple process.

Processing that kind of paperwork, following up with employers and verifying the details is time-intensive—and thus, money-intensive. 

How Does Finicity’s Income Verification Make a Difference?

Open banking gives lenders a way to verify income quickly and securely, by verifying income where income is deposited in bank accounts.

Finicity’s income verification allows borrowers to connect their financial accounts to the lenders or services they’re interacting with. This lets borrowers quickly and securely skip much of the manual paperwork, while lenders can make informed decisions with comprehensive transaction and income data, ranging from 24 months of deposit transactions to estimated annual income and average monthly income. All of the information is categorized and ranked with confidence streams using artificial intelligence and machine learning as part of Finicity’s data analytics solutions.

What do we mean by “comprehensive data?” With open banking, the process of verifying income can go beyond paychecks, tax forms and phone calls. With more consumer-permissioned data sources comes a fuller picture of a borrower’s financial health and more accurate income verification.

Where Does Open Banking Fit into Mortgage Lending?

Mortgages are one of the most significant loans that many consumers will take out in their lifetimes, and the mortgage application process can be complex—to an intimidating degree. According to a recent Finicity survey of homebuyers, the top reason that people hesitate to refinance their home is because of the prospect of going through the income and employment verification and qualification processes all over again. 

Mortgage credit decisioning hinges on the borrower’s ability to make their mortgage payments on time. Most mortgage lenders require borrowers to provide at least two years of employment and income history via tax documents, paystubs and asset statements. The same goes for self-employed borrowers.

Mastercard’s open banking platform (provided by Mastercard’s wholly-owned subsidiary, Finicity), is able to leverage open banking data to satisfy the most stringent guidelines for the highest-value loans. We’re one of the only data providers approved to verify assets and income digitally by Fannie Mae and Freddie Mac. This data also makes it easy to refresh employment verifications right before close to make sure nothing has changed simply by checking whether they received their last paycheck. When you’re working with something as consequential as someone’s home loan, trust is key.

How Can Renters Benefit from Open Banking?

Homeownership isn’t for everyone, and open banking also helps renters navigating the apartment application process. Landlords screening potential tenants can use the same data to make decisions based on the applicant’s income and their historical rental payments. It can also help give context to low credit scores or other potential red flags on the application, resulting in a fairer decisioning process.

When do Auto Loans Require an Income Check?

Auto loans don’t typically require income verification, but the process may come into play when the prospective borrower has a thin credit file, smaller down payment or a lower credit score. The same goes for credit cards, personal loans and growing payment segments like buy-now-pay-later (BNPL).

For thin-file borrowers such as young people and recent immigrants, checking a credit score doesn’t tell their whole financial story. It can lead to frustrating denials, even though they have evidence of qualifying income and that they pay their bills on time. 

By incorporating income and other data—like transactions from connected bank accounts, debt-to-income ratio and more, open finance opens up a world of possibility. Borrowers can be approved for their car loan and qualify for lower interest rates. Lenders, meanwhile, won’t miss out on opportunities to bring new customers on board with a simple process that they can get through while their buyer is still at the dealership.

How can Income Data be Incorporated into Decisioning for Personal Lending?

For many personal lenders, checking income after the fact may not be the most efficient way to approve loans. With open finance, the income, transaction data and analytics can be just as easily incorporated into their lending algorithms as in mortgage and auto lending.

Personal lenders of all types look at hundreds of different pieces of data, depending on how much they’re lending and what it’s for. Open banking provides highly actionable data, direct from the applicant’s bank accounts. It slides seamlessly into their decisioning models.

They no longer have to be satisfied with borrower-submitted income figures or delays in providing supporting documentation when a loan approval is up in the air. Using consumer-permissioned data, lenders receive a nearly real-time view of the applicant’s income and bank account data for a clearer credit decision.

How Does This Help the Consumer?

Verifying income with transaction data permissioned by consumers allows lenders and fintech innovators to simplify the customer experience with a more flexible underwriting process. It provides more choice to consumers, who can still use their paystubs or bank statements while also speeding up the decisioning process by permissioning their financial data.

Open banking adds the data necessary to easily verify income quickly, securely and without manual processes. Whether you’re lending, renting or leasing, Finicity’s income data can simplify the process and provide valuable insights. More data, more time saved, more satisfied borrowers and tenants—open banking helps everyone out.

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Income products

Income verification mortgage

Open banking