There’s an old urban legend/joke that goes something like: Back in the 1950s, when the U.S. and Russia were racing to see who could get into space first, the U.S. threw tons of money at developing a pen that could be used in zero gravity. The Russians? They used pencils.
The joke is appropriate in a lot of situations when one is attempting to highlight that the advancements in technology may not always be the most poignant solution.
Take subprime auto loan underwriting, for example.
A recent article in Automotive News highlighted the growth in subprime loan originations in the automotive industry. The article pointed to a number of reasons for the increase, but one in particular struck me as fascinating.
Credit evaluations are becoming less automated … many more credit applications are being evaluated by people rather than by a computer. Chase and Toyota Financial Services say they don’t use automated decision making.
Lenders and technologists have been trumpeting the arrival of automated underwriting for years. The same issue of Automotive News spotlighted a new BMW program where credit applications are being taken via iPads. (Guess they read my blog.)
I remember covering the subprime mortgage space a decade ago and listening to one lender’s discourse about how automated underwriting would never work in the sector because every loan had a story behind it, explaining why each particular borrower had a poor credit score. Those stories could not be analyzed by a computer, the lender said.
Is this true? Why is technology unable to account for the underlying reasons affecting a borrower’s credit score?
Lenders can spend millions of dollars building a pen that works in space, or they can simply have humans underwrite subprime loan applications. But it seems to me that in the long run, a space pen never gets worn down to a nub. The long-term cost savings associated with automated underwriting should create an economic benefit for attempting to solve the problem.
Obama did say “The Flow of Credit Is the Lifeblood of Our Economy”. I could not disagree more. The lifeblood of the economy should be savings. My parents would never even thing about borrowing against the equity in their home. Excessive and irresponsible borrowing by individuals, as well as relaxed credit standards – is the root cause of our current economic woes.
Mike this is an interesting article. Thanks for bring this to the surface.
Our company E-net Financial Services, Inc. found we could put the deal together but before the deal should be sent to the lender all parties need to communicate together (on line)at the same time. So E-net’s software system can work with each dealer’s Desking and F&I System while allowing the consumers dealer, and lender to participate in the loan approval process live over the internet. This will allow the dealer and lender to be compliant to federal and state regulations.
The Software as a Service (SaaS) process gathers information from a customer’s questionnaire, credit application, credit bureau report and of course the deal structures itself. Then it queries all of the combined information at one time against all the lenders credit risk models the dealer is associated with .
A dealer could have 5 to 50 lenders evaluated in this process. When a lender is selected the lender will be notiified and immediately brought into the sales process over the internet with the customer, and F&I Manager. All parties are looking at the same information and discussing it between themselves via the internet until a decision is made. No more guess work or spot deliveries.
Just completed the development and were looking to bring it to market.
Thanks for bring this information to the surface.
Bill Fowler
It’s pretty safe to say that almost nobody in the sub-prime auto lending business automatically APPROVES loan apps without human intervention. In sub-prime, evaluating the “story” that goes with every borrower is indeed the key to underwriting success. However, there is absolutely a place for automated underwriting to narrow the field of possible approvals for human review. Listening to the “story” and evaluating it is the most time-intensive, subjective, and risky part of the underwriting process. Automated underwriting systems that are well-configured and regularly tuned based on servicing results can save time, reduce as much subjectivity as possible, and wring out risk. They are an essential tool for any lender who expects to grow volume. My company is in the servicing software business and does not sell any automated underwriting tools. But we do get to see servicing results and better results and faster growth come from lenders who effectively use automated underwriting tools.
With the right tools there IS the ability to approve loans without full human intervention. Our company, Clarity Services, Inc. creates robust reports focused solely on the sub-prime, thin file / no file, under banked consumer that not only provide their traditional credit report but also their alternative financial trade lines. This is the data that the traditional bureaus DO NOT collect or report. Which means, auto loan lenders do not get the full story on a sub prime applicant if they are basing it on traditional bureau reporting.
Our reports not only evaluate the traditional data but also those trade lines in the alternative funding market and we look into and score an applicant’s banking behavior and patterns to identify potential risk. We have a number of very predictive elements which help determine not just risk but identity fraud and more.