Use Auto Finance Structuring To Optimize Loan Origination

Say you receive an application and, based on a quick review of credit score, downpayment, or LTV, it fails your credit policies. If you have a legacy loan origination system, the application then sits in a queue, awaiting review by an underwriter. Depending on the queuing formula and number of applications in the queue, any of the following could happen:

• With no backlog, the underwriter immediately reviews the application and attempts to structure a deal and return a conditional approval.
• With a backlog, the application is reviewed by an underwriter, who tries to structure a deal and return a conditional approval. Ideally, applications are queued first-in-first-out (FIFO); there are also more sophisticated queue management and prioritization tactics.
• With or without a backlog, an underwriter reviews the application and issues a decline.

Consider the amount of time needed for a) reviewing an application that initially failed your credit policies, and b) attempting to structure a loan. It varies in ways that make management difficult. Maybe the application needed only a simple modification to term, interest rate, or down payment to match credit policies. In other cases, only the expertise of an experienced underwriter can make the right decision regarding deal structure. In some cases, after careful review and evaluation, the decision is a decline.

In all of these cases, without automation the response requires underwriter review. Response time affects the probability of capturing the deal. If another lender has already responded with a favorable offer, you’ve wasted time and lost the deal.

Through automation, the auto structuring capabilities of a modern loan origination solution can eliminate delays in responding to applications that fail your credit policies. Business users or systems administrators can transform the decision processes that experienced underwriters use in reviewing applications into a set of business rules. These rules are then automatically applied to evaluate applications that failed credit policies in an attempt to return a deal structure without the need for manual review. Let’s consider two scenarios that demonstrate the capabilities and advantages of automated auto finance structuring.

An application arrives, and only one or two attributes cause it to fail your credit policies. Based on the reasons for failure, a specific business rule set is applied. For example, the rules modify the term from 48 months to 60 months and reduce the rate to 8.5%. Or downpayment is increased from $1,500 to $2,500 while all other factors remain unchanged. These simple automated modifications are made in seconds and return a suitable deal structure matching your credit policies.

When an application fails on multiple application attributes, a more sophisticated business rule set is applied. The process uses a waterfall looping technique to reach a resolution. It reviews the reasons for failure and iteratively modifies terms until the deal matches credit policies. The resulting deal structure may include modifications to multiple terms, as well as stipulations for conditional loan approval.

The business rules that drive automated auto finance structuring also give lenders the option to offer several different deal structures, thereby increasing the lender’s chances of capturing the deal. Varying interest rates, down payment options, or terms give the borrower a greater sense of decision control regarding the loan. Multiple deal options also differentiate you from others who offer a single take-it-or-leave-it deal to the applicant.

Easily-configured business rules let lenders quickly create automated processes that mirror common underwriter decisions. As you adjust your credit policies in response to market conditions or changes in overall credit strategy, you can easily reflect those changes in the business rules that automate the auto finance structuring process. Lenders who employ analytics can regularly monitor capture rates of the loan origination process and the results of lending decisions on portfolio performance to fine-tune credit policies and business rules.

Automated auto finance structuring is one of the most powerful capabilities offered by modern loan origination solutions. Business rules and workflows replace many of the manual decision processes traditionally performed by experienced underwriters, reviewing auto loan applications in seconds and returning deal structures optimally suited to lender and borrower. The benefits are considerable:

• Automation greatly reduces decision times allowing you to return a decision to a dealer or applicant in seconds.
• Near-instantaneous decisions increase closure rates without increasing the volume of applications
• Allows underwriters to focus their time and skills on the loan applications that require more in-depth reviews to determine a favorable deal structure.
• Leads to improved accuracy and consistency in deal structures.

There’s a clear trend toward greater process automation in the auto lending industry. Ask yourself how many auto loan applications you’re failing to capture due to slow response times? Using automation, what percentage could be decided in seconds? What is the optimum use of your experienced underwriters’ time and skills? Throughout the entire lending process, there are numerous opportunities to apply automation for improved productivity, and auto financing structuring is one of the best. See what it can do for your organization.