How will the second half of 2018 play out for auto lenders? Will tariffs, trade wars, higher gas prices, rising interest rates, millennial preference for shared vehicles, and a saturated market result in further decline in auto sales? Or will economic upticks, higher wages, increased consumer confidence and incentives prevent a sales decline? Regardless of market direction, auto lenders need to continually improve their ability to compete. Competitiveness assures that your business stays healthy when sales dip, and increases your opportunities when sales increase.
Technology advances incorporated in modern loan origination solutions enable significantly improved efficiency in the underwriting process, specifically through auto-decisioning. Through automation and decision rules you can evaluate applicant information, determine creditworthiness, and structure a deal accordingly, all without the need for human intervention. Quick decisions increase your chances of improving your application to approval to booking ratios.
Auto-Decisioning Improves the Buyer Experience
Most Americans are not big fans of the vehicle-buying process. Today, Seventy-five percent of buyers begin the process online, researching cars, costs, financing, and insurance. Yet even with this preparation, the average buyer spends three hours at the dealer. Half of that time is spent on negotiation or doing paperwork.
Auto-decisioning makes buying a vehicle a better experience. Credit-worthy applicants get near-instantaneous approval and terms, which reduces time spent at the dealer. Most importantly, it allows lenders to be more responsive in an increasingly competitive lending market. You and the dealer want to deliver immediate, accurate lending decisions to qualified buyers before they take their business elsewhere.
Auto-Decisioning Based Solely on FICO Scores
The obvious and immediate use cases for auto-decisioning are applicants with exceptional, very good, and very poor FICO scores. Automation and decision rules verify applicant information, determine creditworthiness, and offer the appropriate loan terms, or auto-decline in the case of very poor scores. Lending decisions are immediate. There’s no need for delay resulting from underwriter intervention.
In a competitive market, the ability to rapidly deliver credit decisions can be the difference between losing or booking a deal.
Auto-Decisioning When You Need More Than a FICO Score
Exceptional, very good and very poor aren’t the only credit score ranges where auto-decisioning works. Auto decisioning can be confidently executed by complementing FICO scores with alternative credit data. Alternative credit data gives lenders additional applicant information that can be used to evaluate creditworthiness. It can include an applicant’s driver’s license and driving records, employment and income, real estate ownership, utility payments, and rentals. Together, these data paint a more detailed and accurate picture of applicant creditworthiness. Based on this complementary information, a lender can then assess risk level and make more confident lending decisions.
For example, an applicant’s FICO score is 680, but the lender would like greater assurance regarding ability to pay. A modern lending solution that supports auto-decisioning automatically accesses an alternative credit data source. It could then return information regarding the applicant’s income, rental payments record, or other relevant data. Based on the values of the alternative credit data decision rules, the software can use that information to determine creditworthiness. Conceptually, the process could be described as:
- if FICO <= 680 then access alternative data for income and rental
- if monthly income >= 4,255 and monthly rental >= 1,500 and payments = non-delinquent then structure lending terms according to established credit policies
- else send application to underwriter for manual evaluation
The same approach could be used to evaluate applicants at any subprime level. At these levels, alternative credit data can help increase the number of qualified borrowers. Applicants whose scores are below the typical level defined as prime, but who show other credible evidence of creditworthiness would then be offered a deal.
Lenders still need to invest time in analyzing performance of their current portfolios, determining which borrower characteristics correlate with ability to pay, determine the degree of risk they’re willing to assume, and then employ automation and decision rules to implement those credit policies.
Auto-Decisioning Supports Compliance
Auto-decisioning enabled by decision rules provides an additional benefit at no extra cost. Lenders struggle to monitor, implement, and demonstrate compliance with current regulations. Decision rules provide irrefutable evidence of the underwriting steps you’ve implemented and the criteria you’ve used to evaluate the creditworthiness of applicants and structure deals. A modern loan origination solution keeps a record of when decision rules were implemented, modified, or deleted. Decision rules bring consistency and credibility to the underwriting process.
Analytics Plays a Key Role in Developing and Refining Your Auto-Decisioning Strategy
Auto-decisioning for exceptional, very good, and very poor FICO scores is straightforward. Auto decisioning for the good, fair, and very poor categories involves both art and science. The science is your ability to analyze your portfolio and identify which factors strongly correlate with loan performance. The art is your ability to apply this insight, balancing risk against reward, to create auto-decision parameters and translate these into decision rules. This is not a once-and-done activity. It’s cyclical: You need to analyze your portfolio, create parameters, implement decision rules, test the results against your portfolio performance, analyze again and fine-tune. You’ll need to consistently monitor portfolio performance so that it reflects your risk management policies.
Impact of Auto-Decisioning on Your Lending Practice
The combination of automation, access to alternative credit data sources, and decision rules provided in a modern loan origination system let you be far more efficient and competitive in lending. The benefits of auto-decisioning are:
- Near-immediate lending decisions that improve the buying experience
- Improved ability to compete, compared with lenders who still rely on manual processes
- Lower overall underwriting costs by replacing manual underwriting steps with automation
- Consistently-executed underwriting steps and decisions support compliance
We’ve provided relatively simple and straightforward examples of auto-decisioning, but decision rules have to power to automate complex underwriting processes. They can be used to calculate multiple financial ratios and deal structures based on a multitude of data sources—standard and alternative—and deliver a higher return on investment, with lower risk in comparison to manual underwriting processes.
defi SOLUTIONS provides a flexible, completely configurable loan origination system (LOS). Our LOS is quick to implement and provides powerful automation and decision rules to support auto-decisioning and help lenders thrive in a competitive market. The defi SOLUTIONS team welcomes the opportunity to discuss your automation needs. Contact our experts online, or better yet, schedule a demo to see how we’ve incorporated the latest data integration and analytics technologies to help you reduce risk and positively impact your lending practice.