Automated Credit Decisioning Guide for Lenders

Loan origination automation speeds the approval process

Automation boosts the productivity and efficiency of the credit decisioning process. When lenders leverage automated credit decisioning, they can define lending criteria more precisely, approve creditworthy customers more quickly, and reject applications from customers who don’t fit their lending portfolio criteria.

Automated credit decisioning uses technologies and algorithms to assess the total lending package that is in front of the lender. The automated system analyzes and evaluates an applicant’s risk profile based on vast amounts of data, including financial history and credit reports. A credit decision is then generated based on predefined criteria and thresholds, allowing lenders to make rapid and consistent loan decisions.

According to a Forrester survey on behalf of Experian, lenders are already using automation across the credit lifecycle and plan to invest more in automation in the coming years. While there are numerous benefits to automated credit decisioning, the survey found there are also several challenges. Automation raises questions about transparency, fairness, and accountability in decision-making and could introduce unintended bias. And the results of automated decision-making could be difficult to explain to customers and regulators. Below is a table detailing the benefits and challenges of automated credit decisioning for lenders.

Automated Credit Decisioning: Benefits and Challenges

Benefits Challenges
Efficiency: Processes large volumes of data quickly and prioritizes low-risk cases, enabling faster decision-making Algorithmic Bias: May inherit or exacerbate biases present in historical data and other sources
Revenue Increase: Produces higher acceptance rates and better customer experience, leading to increased revenue Limited Flexibility: May struggle to handle complex or non-standard credit scenarios that require human judgment
Consistency and Accuracy: Ensures consistent application of predefined rules and criteria and lessens the likelihood of human errors in data entry and calculations Ethical Concerns: Could raise ethical questions about transparency, fairness, and accountability in decision-making
Cost Savings: Reduces the need for manual labor, streamlines processes, and lowers the cost of acqui­sition Initial Setup Costs: Require significant upfront investment in technology and training
Scalability: Scales easily to handle a high volume of credit applications without proportional increases in staffing Customer Perception: Some customers may prefer a human touch and be skeptical of fully automated decisioning
Data Analysis: Provides analysis of a wide range of data sources, including alternative data, to make more informed decisions Regulatory Compliance: May have difficulty adhering to evolving regulatory requirements and explaining compliance to regulators
Audit Trail: Provides a comprehensive audit trail that facilitates compliance with regulatory requirements Technology Dependency: May be disrupted by technical glitches or system failures, requiring prompt resolution
Rapid Adaptation: Automated systems can be quickly updated to incorporate changes in regulations or business strategies Lack of Human Context: Lacks the human touch needed to understand nuanced situations or unexpected events affecting creditworthiness
24/7 Availability:
Operate around the clock, providing customers with instant decisions at any time
Security Concerns:
May be more susceptible to cyber threats, requiring robust security measures

Automated credit decisioning offers advantages and challenges that lenders should carefully weigh, considering their business needs and the expectations of customers. Monitoring, testing, and updates are essential best practices to ensure the effectiveness, fairness, and compliance of automated credit decisioning systems.

Automated Credit Decisioning: 10 Best Practices

So, what best practices can lenders use to avoid the pitfalls of automated credit decisioning while still enjoying the benefits? Here are the top 10 best practices for lenders:

  1. Objectives and Criteria
  • Clearly articulate the objectives of the automated credit decisioning system.
  • Establish the criteria used for credit evaluations based on risk tolerance and business goals.
  1. Data Quality and Integration
  • Ensure the accuracy and reliability of the data used in the decision-making process.
  • Leverage advanced data aggregation tools and technologies to efficiently collect and integrate data from various sources, both traditional and alternative data.
  • Regularly audit and clean data to remove inconsistencies and redundancies.
  1. Scalability and Flexibility
  • Use cloud-based solutions for scalable data storage and fluctuations in application volumes.
  • Regularly update models based on evolving consumer trends and behaviors.
  • Develop flexible decision models to accommodate lending criteria, regulations, or business strategy changes.
  1. Explainability and Transparency
  • Prioritize using explainable models that allow stakeholders, including customers, to understand the factors influencing credit decisions.
  • Be transparent about the factors influencing credit decisions and avenues for recourse in disputes.
  • Incorporate mechanisms for human oversight, especially in complex or exceptional cases.
  1. Continuous Monitoring and Improvement
  • Implement monitoring tools to track the performance of the automated system.
  • Regularly review and update decision models based on performance analytics and emerging trends.
  • Regularly audit automated credit decisioning models for bias.
  1. Compliance
  • Regularly update the system to ensure compliance with changing regulatory requirements.
  • Establish clear guidelines for the ethical use of customer data, ensuring privacy and transparency in the decisioning process.
  1. Security
  • Implement robust security measures to safeguard customer data and protect against cyber threats.
  • Regularly update security protocols to address evolving risks.
  • Streamline identity verification processes to reduce false positives and prevent fraud.
  1. Training and Skill Development
  • Provide training for staff managing and overseeing the automated credit decisioning process.
  • Encourage continuous learning and skill development for all key stakeholders in the credit decisioning and strategy process.
  1. Documentation
  • Maintain comprehensive documentation of the credit decisioning process for auditing purposes.
  • Document any changes made to decision models and the rationale behind them.
  1. Testing and Validation
  • Conduct thorough testing before deployment to identify and rectify any issues.
  • Regularly validate the performance of the credit decisioning models, especially when introducing changes.

Using these best practices, lenders can build a robust and responsible automated credit decisioning system that aligns with regulations, protects customers, and supports their overall goals. 

Technologies To Improve the Credit Decisioning Process

Lenders can use various technologies to improve efficiency, accuracy, and overall customer experience of their automated credit decisioning process. Below, we list some of those key technologies.

  • Auto approval or auto decline produces the simplest result from a potentially complex reasoning process.
  • Auto conditioning returns a single-deal alternative.
  • Auto deal structuring provides a matrix of options on a lease or loan that includes the lowest down payment and alternatives for term, interest, and monthly payment.
  • Smart queues in manual decisioning enable efficient individual or group queuing with configurable permissions and authorities.
  • Credit flows are small pieces of configurable credit steps that do only what is needed at a particular point in the decision process. The technology includes a library of pre-built flows, which admins can edit to fit each lender’s unique purpose.
  • Alternative data integration provides a more comprehensive view of an individual’s creditworthiness.
  • Application programming interfaces (APIs) integrate systems with external data sources, credit bureaus, and financial institutions.
  • Decision management systems can automate and optimize decision-making processes and enable management and adjustment of decision rules and logic.
  • Cloud computing provides scalability, flexibility, and cost-effectiveness and can be easily integrated with other services.
  • Mobile technologies enhance accessibility and provide a convenient channel for customers to interact with the credit decisioning system.
  • RegTech solutions ensure that credit decisioning processes align with regulatory requirements.
  • Chatbots and virtual assistants enhance customer engagement and provide real-time assistance during the lending process.
  • Natural language processing provides insights into customer sentiment and behavior by analyzing unstructured data, such as customer communications.

By leveraging these technologies, lenders can create a more robust and efficient automated credit decisioning process that improves decision accuracy and enhances the overall customer experience. It’s crucial to update and refine these technologies regularly to stay aligned with industry trends and maintain a competitive edge.

When a lender is ready to leverage automated credit decisioning, they should look for software vendors like defi SOLUTIONS with a track record of employing cutting-edge technology to improve the lending process. Through containerization, cloud-native systems, access to system APIs, and our dedication to innovation, defi provides foundational support for advanced functionality like machine learning and artificial intelligence.

Getting Started

defi SOLUTIONS is redefining loan origination with software solutions and services that enable lenders to automate, streamline, and deliver on their complete end-to-end lending lifecycle. Borrowers want a quick turnaround on their loan applications, and lenders want quick decisions that satisfy borrowers and hold up under scrutiny. With defi ORIGINATIONS, lenders can increase revenue and productivity through automation, configuration, and integrations and incorporate data and services that meet unique needs. For more information on automated credit decisioning, contact our team today and learn how our cloud-based loan origination products can transform your business.

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