AIM for Self-Employed - Freddie Mac...AIM for Self-Employed Introduction This reference is for understanding the automated income assessment with Loan Product Advisor using tax return

April 2019 www.FreddieMac.com/learn/

AIM for Self-Employed

Introduction

This reference is for understanding the automated income assessment with Loan Product Advisor using tax return data, part of the asset and income modeler (AIM) as AIM for self-employed, and provides information to help you understand:

▪ What Is AIM for Self-Employed?

▪ Defined Terms

▪ How it Works (high-level view)

▪ Eligibility Requirements

▪ Loan Product Advisor Assessment of Income and/or Loss Calculations and Feedback Messages

▪ Income Representation and Warranty Relief

▪ Initial Setup

o Steps for Originating Loans

▪ Importance of Reference Number

▪ Additional Tips and Reminders

▪ Where to Get Help

▪ Appendix A Examples – Loan Product Advisor Messages

What Is AIM for Self-Employed?

AIM for self-employed (automated income assessment with Loan Product Advisor using tax return data) is a capability within Loan Product Advisor that leverages access to optical character recognition (OCR) technology from third-party service providers to help enable the automation of certain income calculations for self-employed borrowers; and provides you with the option for Loan Product Advisor to determine if you are eligible for relief from enforcement of certain representations and warranties related to the borrower’s income based on tax return data.

How does this happen? After uploading your borrower’s federal income tax returns to a Freddie Mac designated third-party service provider, a report (“Income Calculation Report) is returned for your review and verification in accordance with the requirements of Section 5903.3(a). Once the report is verified, you must enter a unique reference number assigned by the service provider to the mortgage into Loan Product Advisor along with your submission. From there, Loan Product Advisor applies calculation and eligibility rules to assess for income representation and warranty relief eligibility and returns the result of the assessment on the last Feedback Certificate.

AIM for self-employed makes it easier to:

▪ Grow your business: Simpler underwriting helps you take on self-employed loans you might have avoided before.

▪ Close loans faster: Automation speeds up income assessment and creates efficiency.

▪ Get immediate representation and warranty relief: Related to certain borrower employment income.

Note: Vertical revision bars “ “ are also used in the margin of this reference to highlight new requirements and/or significant changes.

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Defined Terms

The following terms are used throughout this document:

Term Definition

Eligible Income Sources

The following income sources are eligible for AIM for self-employed:

▪ Sole Proprietorships reported on Internal Revenue Service (IRS) Schedule C

▪ S Corporations reported on IRS Form 1120S (including compensation of

officers reported on IRS Form W-2), IRS Form 8825, and IRS Schedule K-1

(Form 1120S)

▪ Partnerships reported on IRS Form 1065, IRS Form 8825 and IRS Schedule

K-1 (Form 1065)

Income Calculation Report The document provided by the service provider that you are responsible for

reviewing to determine if any adjustments to the income must be made based on

information in the mortgage file

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Process Flow: The following process flow provides a high-level overview of how AIM for self-employed works.

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Eligibility Requirements

Loans must be submitted to Loan Product Advisor Version S4.8.00 or higher and meet the following requirements outlined

in Guide Chapter 5903:

Topic Requirements

Eligible Mortgages Conventional Mortgages (conforming and super conforming) delivered through Loan

Selling Advisor as a Loan Product Advisor Mortgage

Loan Product Advisor Risk

Class

Accept

Loan Purpose Purchase or Refinance

Eligible Income Sources

The following income sources are eligible for AIM for self-employed

▪ Sole Proprietorships reported on Internal Revenue Service (IRS) Schedule C

▪ S Corporations reported on IRS Form 1120S (including compensation of officers reported on IRS Form W-2), IRS Form 8825 and IRS Schedule K-1 (Form 1120S)

▪ Partnerships reported on IRS Form 1065, IRS Form 8825 and IRS Schedule K-1 (Form 1065)

Underwriting Requirements ▪ The borrower must have been self-employed and received income from the

same eligible income source on the Income Calculation Report for the most

recent two years. When the borrower’s business has been in existence for less

than five years, or the borrower has owned the business for less than five

years, the borrower’s federal income tax returns must reflect at least two years

of receipt of income and/or losses from the business.

▪ Review and verify the Income Calculation Report provided by the service

provider to determine if any adjustments to the income must be made based

on information in the mortgage file. If so, you must update the Income

Calculation Report, upload it to the service provider along with any additional

documentation necessary to support the updates, then submit to Loan Product

Advisor.

▪ Income reported on the business tax returns but not on personal tax returns

must not be considered as stable monthly income.

▪ You must perform a business and income analysis as described in

Section 5304.1(d) for all eligible income sources that appear on the Income

Calculation Report and from which positive borrower income is calculated.

▪ You must verify the current existence of the business as described in Section 5304.1(g).

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Topic Requirements

General Requirements ▪ Inconsistent or Contradictory Information - You are responsible for

investigating and resolving any inconsistent or contradictory information

contained in the Income Calculation Report, tax returns and/or the loan file

and, if necessary, updating the information in Loan Product Advisor and/or the

Income Calculation Report for resubmission of the data as necessary. For

example, if you determine that a business for which income was calculated is

no longer in operation, you must exclude it from the qualifying income.

▪ Income Continuance - You must have no knowledge, information or

documentation that contradicts a reasonable expectation of continuance of

income or probability of consistent receipt for at least the next three years.

Documentation

Requirements

Retain the following documentation in the mortgage file:

▪ For all eligible income sources on the Income Calculation Report from which

positive borrower income is calculated, all documentation used to fulfill

business and income analysis requirements in Section 5304.1(d) (e.g.,

business financial statement, business asset statement).

▪ Documentation to support adjustments(s) to the Income Calculation Report

described in Section 5903.3(a), if applicable.

▪ Documentation to verify current existence of business in accordance with

5304.1(g). ▪ In addition to the requirements of Topic 3300, all documentation submitted to

the service provider as well as the Income Calculation Report used by Loan

Product Advisor.

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Topic Requirements

Federal Tax Returns-

Requirements

The tax returns uploaded to the service provider must meet the following requirements:

Topic Requirement

IRS Filing Must be borrower’s most recent return(s) filed with the IRS.

Age of Tax Returns For mortgages with Loan Product Advisor initial submission

dates on or after May 1, the tax returns must be from the

most recent tax year (e.g., if the Loan Product Advisor

submission date is after April 30, 2019 and before May 1,

2020, the most recent tax return must be from 2018).

Minimum History of

Receipt of

Income/Loss

When the borrower’s business has been in existence for

less than five years, or the Borrower has owned the

business for less than 5 years, the Borrower’s federal

income tax returns must reflect at least two years of receipt

of income and/or losses from the business.

Business/Tax Form

Structure

The income and/or loss reflected in the tax returns must be

reported for the same business on the same tax form

structure. For example, the business cannot be reported as

a sole proprietorship and then converted to a partnership.

Tax Return

Restrictions

Returns must not be:

▪ Filed on a fiscal year basis

▪ Handwritten

▪ An amended return

▪ From a U.S. Territory

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Topic Requirements

Loan Product Advisor Data

Entry

Loan must be submitted to Loan Product Advisor with:

▪ Self-employment indicated if borrower has an ownership interest of 25% or more in

the business. Otherwise, the feedback messages will be incomplete.

▪ Report reference number issued in the report by the service provider.

Loan Product Advisor:

Required Resubmission

If, for any reason, the Income Calculation Report is updated, or additional income

documentation is provided, you must upload the updated report and/or income

documentation to the service provider and resubmit the loan with the same reference

number to Loan Product Advisor.

Delivery Loan must be delivered through Loan Selling AdvisorSM as a Loan Product Advisor

loan with an LP AUS Key Number.

Seller’s In-House Quality Control Program

Quality Control requirements are the same as those for all loans subject to the requirements in Guide Chapter 3402.

Loan Product Advisor Assessment of Income and/or Loss Calculations and Feedback Messages

Loan Product Advisor assesses the calculation of income and/or losses on an individual borrower-level and individual

business-level basis from the Income Sources based on the tax returns and the Income Calculation Report you upload to

the service provider.

Loan Product Advisor will return income representation and warranty result eligibility messages in the Feedback

Certificate specifying whether the mortgage is eligible for relief from enforcement of certain reps and warranties.

Note: Refer to Appendix A for Loan Product Advisor Feedback Certificate message examples.

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Income Representation and Warranty Relief

For Mortgages originated and delivered under AIM for self-employed (automated income assessment with Loan Product

Advisor using tax return data) that receive:

▪ A Loan Product Advisor Risk Class of “Accept”, and

▪ An income representation and warranty result on the Last Feedback Certificate of “Eligible”,

Freddie Mac will not enforce the representations and warranties regarding the accuracy of the income

calculations related to the eligible income sources on the Income Calculation Report.

Getting Started

The next several sub-sections cover details including the initial setup process and steps for originating loans with AIM for

self-employed.

Initial Setup

To participate, you must first have an agreement with a designated service provider, (e.g. LoanBeam). In your agreement,

the service provider must agree to:

▪ Utilize its proprietary technology to extract data from borrower tax returns you submit to enable calculation of certain

self-employment income/loss, including the Income Sources.

▪ Generate an Income Calculation Report with a unique reference number and submit it to you in the form of an Excel

workbook.

▪ Forward the Income Calculation Report and all income documentation you uploaded to the service provider to Freddie

Mac through Loan Product Advisor.

Steps for Originating Loans

To use this new capability using LoanBeam integration with Loan Product Advisor there are operational, Loan Origination System (LOS), and LoanBeam system impacts to take into consideration before implementing this capability. Once you are ready to begin using this service follow and complete the steps outlined below. Based on your organization’s business processes, the order in which you complete the steps may vary.

Step 1: Order the Workbook Report from the Service Provider

As part of your process for gathering loan application data and authorizations, also obtain the borrower’s authorization

to share their tax returns and other relevant income information with the service provider and Freddie Mac. After you

have obtained the borrower’s authorization, order the service provider’s workbook.

Step 2: Reconcile the Report

The service provider completes the report request and returns the Income Calculation Report (Excel workbook) to

you. After you receive the report, capture the reference number. The reference number issued by the service provider

will apply to a maximum of one IRS Form 1040 for each applicable calendar year, with no more than two borrowers on

the same 1040 when filed jointly.

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Important: The original reference number must be used with all subsequent submissions to the service provider to

update information and with all loan data submissions to Loan Product Advisor.

Next, Review the Income Calculation Report to determine if any adjustment to the income must be made based on

the information in the mortgage file and, if so, update the Income Calculation Report accordingly.

▪ Are the income calculations acceptable or do manual changes need to be made to the report?

▪ Is there non-continuing income, or income that should be excluded, such as income from a person on the tax

return who is not a borrower on the loan?

▪ Is there conflicting information that may require help from the service provider (e.g. LoanBeam) support team

to resolve?

Uploading Additional Income Documentation

If you need to upload additional income documentation to the service provider, edit your previous request so you

are uploading documentation to the service provider’s existing application ID. Request an updated workbook from

the service provider. The service provider will generate an updated workbook and return an updated version of

the Income Calculation Report to you with the same reference number.

Updates to the Income Calculation Report

If you need to make manual updates to the Income Calculation Report, save the changes in the workbook and

upload the report to the service provider under the same reference number so Loan Product Advisor can access

the updated Income Calculation Report.

Note: Refer to Defined Terms for Income Calculation Report.

The following are examples of workbook sheets from the service provider’s (e.g. LoanBeam) workbook:

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LoanBeam Income Calculation Report Example – Cover Page

LoanBeam Income Calculation Report Example – Schedule C, Partnership, S Corporation

Cover Page displays the Reference number that must be entered in Loan Product Advisor.

Tips when reviewing the Schedule C, Partnership

and S Corporation sheets:

1. White cells can be adjusted. For example,

non-recurring income should be excluded.

2. A box can be checked to exclude all the

income from the form if, for example, the

business no longer exists, the box must be

checked.

Note: If you need to make manual updates to the

report, save the changes in the workbook and

upload the report to the service provider under the

same reference number so Loan Product Advisor

can access the updated Income Calculation

Report.

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Step 3: Complete Loan Product Advisor Loan Data Entry

Once you have reviewed the Income Calculation Report and made any applicable adjustments, complete loan data

entry in your loan origination system. Keep the following requirements in mind when entering data:

▪ Include the reference number assigned by the service provider in the Report ID field with the submission for Loan

Product Advisor to access the report.

▪ “Yes” must be selected for the Self-Employed indicator field in the Borrower Employment Details if the borrower

has an ownership interest of 25% or more in the business, and the amount of self-employed income you used to

underwrite the loan entered in the Base Employment Income field.

▪ You may enter income types for a borrower in Loan Product Advisor even if the income is not from an Income

Source under the capability (for example, employed income).

Step 4: Submit the Loan to Loan Product Advisor

From your system, submit the loan to Loan Product Advisor. Loan Product Advisor sends a request with the Report ID

(reference number) to the service provider. The service provider must match the information provided in the request to

release the workbook data to Loan Product Advisor.

If a match is not made, (for example, an invalid reference number or invalid workbook) messages are returned

indicating Loan Product Advisor was unable to process the report for an individual borrower.

Step 5: Review the Loan Product Advisor Feedback Certificate

Loan Product Advisor Messages are returned in the Employment & Income section of the Feedback Certificate

regarding:

▪ Rep and Warranty Result: An eligibility message will be displayed specifying either eligible or not eligible.

▪ Borrower-level Message: A borrower-level message will be displayed when the calculations from all Income

Sources for that borrower are assessable.

▪ Business-level Message: Business-level messages will be displayed for each eligible income source.

Review the messages and reconcile them against the information in the Income Calculation Report. Also, verify that

the report date and time on the Income Calculation Report matches the report date and time in the Loan Product

Advisor message(s). Keep in mind, after you review the messages and determine what, if any action is needed, you

may choose to resubmit the loan.

Note: On resubmissions, maintain the same reference number in the Report ID field.

Step 6: Deliver the Loan to Freddie Mac

When you are ready to deliver the loan to Freddie Mac, you must deliver it through Loan Selling Advisor as a Loan

Product Advisor loan. Loan Selling Advisor confirms that the data from the Last Feedback Certificate is consistent with

the data delivered in Loan Selling Advisor, and when applicable, provides relief from enforcement of certain selling rep

and warranties related to the accuracy of income calculations.

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Importance of Reference Number

The service provider assigns a unique reference number to the Income Calculation Report (workbook). This number is

associated with an application ID at the service provider. Identifying and using the correctly formatted reference number is

critical for Loan Product Advisor to access the Income Calculation Report. The following are items to keep in mind with

regards to the reference number:

1. The reference number is located in a field in the workbook provided by the service provider.

2. If there are multiple versions of the workbook, there is still only one reference number. The reference number plus

the applicable date and time makes each workbook version unique.

3. Based on the reference number provided to Loan Product Advisor, Loan Product Advisor will receive the latest

version of the workbook that you send back to the service provider.

4. If you did not make any changes to the workbook and upload back to the service provider, Loan Product Advisor

will receive the original version generated by the service provider.

5. If you don’t want Loan Product Advisor to use the workbook provided by the service provider, omit the reference

number from your Loan Product Advisor request.

6. Ensure you are requesting the correct workbook when ordering and uploading to the service provider (e.g.

LoanBeam) and submitting the loan to Loan Product Advisor.

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Additional Tips and Reminders

▪ Loans – By requesting an income report from the service provider, (e.g. LoanBeam) and entering the applicable

reference number in Loan Product Advisor, you are requesting the capability to be initiated in Loan Product Advisor.

Use of this capability is not required.

▪ Self-Employed Indicator – Ensure the self-employed indicator is selected in Loan Product Advisor, if the borrower

has an ownership interest of 25% or more in a business, to receive all the applicable self-employed feedback

messages.

▪ Updated Income Information – If, for any reason, you update the Income Calculation Report, or provide additional

income documentation, you must upload the updated report and/or income documentation to the service provider and

resubmit the loan with the same reference number to Loan Product Advisor.

▪ Ineligible Income Sources – All income must meet the requirements of the Guide. Income not included under this

capability may be used to qualify the borrower, provided the income meets Guide requirements. For instance, the

following income sources may be shown on the tax returns but are not included under this capability; however, these

income sources may still be used to qualify:

o Wages, Salaries, Tips, etc. (1040 Line 7)

o Taxable and non-taxable interest (1040 line 8)

o Dividends (1040 line 9)

o Alimony (1040 line 11)

o Capital Gains (1040 line13)

o Other gains/losses (1040 line 14)

o IRA distributions (1040 line 15)

o Pensions/annuities (1040 line 16)

o Rental/Royalties (1040, line 17, Schedule E)

o Unemployment Compensation (1040, line 19)

o Social Security (1040, line 20)

o Other income (line 21)

Where to Get Help

For additional questions and support related to AIM for self-employed, please contact your Freddie Mac representative.

For questions related to LoanBeam’s workbook, contact the LoanBeam support team.

This document is not a replacement or substitute for the information found in the Freddie Mac Single-Family

Seller/Servicer Guide or terms of your other Purchase Documents.

© 2019 Freddie Mac

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Appendix A: Examples – Loan Product Advisor Messages

The following Feedback Certificate Employment & Income section examples display messages you may see in your

results.

Note: The Income R&W shield on the Feedback Certificate will be available in a future Loan Product Advisor release.

Example 1 – Rep and Warranty Result: Eligible

The loan was submitted with $10,000 in total qualifying income:

The results from the following example indicate:

a) Rep and Warranty Result Message: Eligible (Message 24).

b) Income Calculation Report: Third-party report is sufficient documentation to support the income. Retain report in

the loan file. (Message 8V).

c) The total amount of derived income for John Freddie is: $4,240.41, and for Mary Freddie: $3,399.50. (Message TG)

Note: The derived income is less than the submitted income. Because the derived income supports the

loan. No further action is needed.

d) Business-level Message: A business-level message will be displayed for each Income Source, specifying the

business type (for example, sole proprietorship), name of business and calculated income amount, when the

calculation is assessable and derived using the tax returns uploaded to the service provider and the Income

Calculation Report. (Messages TH).

e) The loan must be documented with the documentation uploaded to the service provider and the final Income

Calculation Report (Message TK).

f) Documentation Requirement – Businesses in Existence < 5 years: Reminder message returned when only

one year of tax returns were uploaded for a sole proprietorship. You must determine whether two years are

needed, regardless of rep and warranty result (Message TR).

g) Loan Product Advisor Self-Employed Indicator: “Yes” was selected for the Loan Product Advisor Self-

Employed indicator field so the traditional self-employed income documentation requirements for John Freddie

and Mary Freddie are displayed (Messages 1K, 5C and CY).

Note: Disregard Message 30. The Feedback Certificate will be updated at a future date.

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Appendix B: Examples – Loan Product Advisor Messages

a)

b)

c)

d)

e)

f)

g)

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Example 2 – Rep and Warranty Result: Not Eligible

The results from the following example indicate:

a) Rep and Warranty Result Message: Not Eligible (Message 23).

b) Income-level Messages: A message will be displayed when the income source is not eligible for income

calculation assessment and the reason. (For example, “loan includes Farm income/loss using tax returns

uploaded to LoanBeam”) (New Message TP).

c) Business-level Message: A business-level message will be displayed for each Income Source, specifying the

business type (for example, sole proprietorship), name of business and the reason the Income Source was not

included in the income calculation assessment when the calculation is assessable (New Message MW).

d) Business-level Message: A business-level message will be displayed for each Income Source, specifying the

business type (for example, sole proprietorship), name of business and calculated income amount, when the

calculation is assessable (Messages TH).

e) The loan must be documented with information submitted to the service provider and the final Income Calculation

Report (Message TK).

f) Loan Product Advisor Self-Employed Indicator: “Yes” was selected for the Loan Product Advisor Self-

Employed indicator field so the traditional self-employed income documentation requirements for John Freddie

and Mary Freddie are displayed (Messages 1K, 5C and CY).

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a)

b)

c)

d)

e)

Example 2

f)