A Decision Engine for responsible lenders is only as good as its rules.
If rules for deciding whether loans should be accepted, declined or referred don’t align with loans officer thinking, buy-in for automation may be limited.
If lending strategies don’t align to lending policies, credit governance will be weak.
We’ve been reviewing automated decisioning strategies with our clients. The aim has been to add ‘depth’ to the rules. Consequently auto-accept rates rise even further. As a result automation delivers more cost savings.
Big upgrades are on the way…
Affordability rules are better geared towards Covid-19. Additionally, there’s product level decisioning. Specific rules for revolving credit, consolidation and homeowner loans are on their way.
Rules can be configured at a lender level. Choose how far back to look. Refer rather than auto-decline certain types of default. For example, mail order or mobile phones under £500. Refer rather than decline County Court Judgments is they’re under a certain value.
In other words, precise rules to better match lending policy.
The underlying tests of affordability remain important. For example, a ratio to show the value of monthly payments against monthly income. An annual debt ratio shows the total debts as a proportion of annual income.
But Covid-19 requires alerts if the situation has changed really recently. Has income fallen lately? Is there a missed payment in the last few weeks? Have credit card balances been rising rapidly?
Open Banking provides useful proxies for indebtedness. It gives an up to date picture of income and expenditure. However, the only reliable way to assess an applicant’s indebtedness and missed payments is Credit Reference Agency (CRA) data. At NestEgg we combine Open Banking and CRA information, providing a holistic view of affordability.
Product level decisioning
The credit union movement has long debated revolving credit. How do you predict whether an applicant will reach their credit limits and then walk away?
Consolidation loans offer a huge opportunity for loan book growth. Covid-19 means more people want to simplify their finances with one easy payment. But how do we know that a borrower won’t just pay off their credit cards and then proceed to reach their limits once more?
If you’d like to learn more about our approach to these challenges, contact us.
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