The USDA’s outdated underwriting system is hobbling rural lending

Qualifying a borrower for the Rural Housing Service’s 502 Guaranteed loan is not an easy feat. Those who apply for the loan have to tick off numerous boxes, including having a maximum income of a little over $100,000 and not being able to qualify for a conventional mortgage. 

But lenders say that using the Department of Agriculture’s “not intuitive,” “confusing” and “cumbersome” technology, dubbed the Guaranteed Underwriting System (GUS), complicates things even further and is serving to discourage them from offering such loans. 

“It’s just a lot more complicated and there’s a lot more steps,” said Jonas Pritchard, a loan officer at Scenic Oak Funding. “And just like anything in life, if something’s easy and something’s not, what are most people going to choose?”

Stakeholders in the industry also say the platform, originally launched in 2006, has not kept up with the pace of enhancements of other automated underwriting systems, such as Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Product Advisor. As a result, the RHS’ loan program, which plays a vital role in providing mortgage credit for rural communities, may continue to be underused. Last year, USDA loan volume made up a mere 0.49% of all mortgage originations, according to the Mortgage Bankers Association.

In 2021, the USDA made some upgrades to GUS, but a lack of resources continue to complicate the agency’s efforts to modernize their automated underwriting system.

“We are committed to getting it completed to further streamline the loan process and to make the system more accessible for everyone who uses it,” the USDA spokesperson said.

They note though that “this is a huge undertaking” and upgrades will “require a significant amount of time.” 

The USDA has asked for $73.6 million to fund RHS’ information technology in 2023, a significantly higher number than the $20 million requested by the USDA in 2022 for IT improvements. The USDA declined to comment on what the funding would be used for.

However, it is likely that some of the funding will go to revamping GUS. There is already a roadmap for improvements scheduled for 2023, but that plan depends on government funding, a source familiar with the GUS system said. 

In September, the federal government invited industry experts to share feedback on USDA’s programs and outdated technologies. During the listening session, government officials said that they intend to modernize the RHS program in the near future. This could pave the way for additional funding to be made available for improvements to the program.

Problems with the GUS
The main complaint about the GUS is that it is not easy to use. Unlike the government sponsored enterprises’ automated underwriting systems, GUS is not integrated with any loan origination systems. 

Because of that, loan officers have to type in borrower information into two systems, their loan origination system and GUS, said Mike Metivier, vice president of mortgage lending at Guaranteed Rate. To qualify a borrower for any other loan, whether it be a Fannie Mae or Freddie Mac loan, you fill out one form and click a button. Within a few minutes, the application gets approved or denied. 

“[GUS] is so inconvenient because you have to manually re-enter all of the information,” said Metivier “They did with the most recent revamp put together a feature where you’re supposed to be able to download the 10-03 [mortgage loan application] and import it, but I tried to do it maybe a few days ago and it just wouldn’t work, so I ended up filling it in manually.”

Metivier added, “The integration piece is huge. FHA is a government product, VA is a government product. Why are their systems integrated into any LOS, you know, Encompass or what have you, and for USDA that’s not the case? That just doesn’t make sense to me.”

According to a source with knowledge about the USDA’s tech initiatives, plans are in place to integrate GUS into loan origination platforms in calendar year 2023, but the project is contingent on future appropriations.

“The development of the integration has been on USDA’s radar since GUS was first deployed in 2006,” said the source. “However, other development priorities and lack of development funding is why that integration capability has not yet been implemented.”

Loan officers also point out that without proper training, it’s difficult to figure out how to maneuver on the platform.

“The platform on its face is confusing and there’s no clear direction on how and where to go if you have a problem,” said Matthew Gaddis, branch manager at Amres, a multi-state lender headquartered in Feasterville-Trevose, Pennsylvania. “I think it’s intuitive only because I was trained well on it by somebody else who put the work in to understanding it.” 

Gaddis said that in terms of usability, GUS is more like a four out of 10. “Very, very hard to understand if you don’t know what’s already going on.”

Loan officers also have a myriad of tiny annoyances with the GUS system such as the password expiring, the system being unclear about errors that it flagged, and a cap on the amount of reruns that an LO can do when trying to qualify a borrower for a loan.

When an LO caps out their submissions, they sometimes have to wait days for a response from the USDA, David Battany, executive vice president at Guild Mortgage said.

“Sometimes the USDA answers the phones quickly, other times, you’re waiting for hours and sometimes multiple days to get an answer to your question,” Battany said. “The point is if it’s an automated system, you shouldn’t have to take pauses in getting help from humans.”

A glimmer of hope
The USDA has ambitious goals for upgrading their technologies next year.

Apart from integrating GUS into loan origination platforms, there are also plans to automate lender approval and recertification, as well as allow for originators to receive approvals systematically, without having to send a file to USDA for a manual approval by staff, a source familiar with USDA’s planned tech initiatives said.

But all of these plans hang on the hope that USDA gets the funding that they requested for IT modernization. The federal government’s increased interest in the USDA program is key to that. A recent hearing held by the Senate Banking Committee on Housing in late September could signal that the federal government may be looking to further reform RHS lending. 

During the session, Senator Mike Rounds, R-S.D., said that he and his colleagues are “looking to make updates to RHS” and that there are many ways to “streamline and modernize RHS to more effectively serve rural Americans.”

“We will be looking at ways to streamline regulatory requirements for programs as cumbersome processes have deterred nonprofits from utilizing the programs,” Rounds said. “In that vein, staffing and IT upgrades are imperative as we evaluate how to make RHS more effective.”

The Senate is currently in the process of developing a bipartisan package of reforms that could be considered after the November 2022 midterm election. Some of these reforms may address tech modernization.

Battany, who was one of the speakers during the hearing, said that appropriations for the USDA program have not been enough and that he hopes that this will soon change.

“A really good example [that more funding is needed] that’s really powerful is the USDA programs every year always seem to run out of dollars. So if you’re a borrower toward the end of the year, and you close a loan in November, it’s not uncommon that your loan officer tells you ‘hey, we can’t close on time, because the USDA guarantee authority has expired or ran out of dollars.'”

He also noted that Fannie and Freddie get revenues from their operations, “so they can then choose how much revenue they want to spend on technology and technology investments,” but USDA is strapped for cash to innovate because they rely on federal money.

David Lipsetz, president at the Housing Assistance Council (HAC) and a former associate administrator for Rural Housing at the USDA, said that the program has received “zero financial support” in the last couple of years.

“An increase doesn’t mean much in this context, right?,” Lipsetz said. “I would love it if we were doing better than zero.”

“So if you’re at USDA and you’re not getting money for computer systems, then you have to make do with what you have and they have been for a long time,” Lipsetz continued. “I’m really hopeful that the effort of Senator Mike Rounds and Senator Tina Smith, and having that hearing, increases attention to the needs of these programs.”