The files should be present in the same server where Identity Validator is installed. However, you have the option to point at a new network share for the file. To access the files, choose either a file name, which explicitly selects a single file or a file pattern, where all files that match the expression pattern are considered.
Instances where you don't know the filename in a directory because there is no filename but has a pattern. For example, a timestamp you can specify a filename pattern to match the files you need to access.
HINT:Hover over the fields when you setup a TextFile connection and it will give you more information.