Credit union risk management covers a range of concerns: Interest rates, liquidity, economic trends, institutional reputation, credit, and compliance. External risks such as interest rates, weakness in the local economy, and changing demographics can be difficult to contend with. Internal risks tied to credit and compliance are far easier to manage thanks to advancements in loan origination solutions. Let’s take a quick look at how innovative capabilities help credit unions reduce credit risk while helping them comply with an increasing number of regulations.
Identify Potential Fraud Before It Affects the Loan Portfolio
Delinquencies that result in defaults are the biggest credit risk. The earlier potential risks are identified and mitigated the greater the benefit to the credit union. Modern loan origination solutions now evaluate loan applications to uncover both overt and subtle indicators of fraud that strongly correlate with defaults. The most frequently seen ploys include:
- Identity theft—stolen personal information is used by individuals or cartels set on financial theft
- Income misrepresentation—easy to create, false pay stubs can enable a larger loan or better terms
- Employment falsification—poor or inconsistent employment record history can be hidden
- Collateral inflation—a better asset standing can be conveyed than the applicant actually has
- Straw buyers—a front for an individual who lacks the financial standing or credit score
Powerful machine learning techniques analyze loan applications, comparing the data with tens of millions of legitimate and fraudulent applications provided by a consortium of lenders. When suspected fraud is uncovered the algorithms indicate the fraud type and assign it a score that lets credit unions determine next steps in the underwriting process. Low scores resulting from income or employment discrepancies might be further investigated with a call to the employer. High scores related to identity theft or a straw buyer could automatically be declined.
Machine learning delivers two distinct advantages with respect to credit union risk management. First, it is an automated process, invoked as part of the preliminary qualifications in an underwriting process. Second, it’s magnitudes more efficient in comparison to any manual fraud detection.
Use Decision Rules to Consistently and Convincingly Demonstrate Compliance
The increasing volume and complexity of regulations that credit unions must comply with are best met with decision rules as part of the underwriting process. Decision rules translate regulations into consistently executed tasks. When implemented in the underwriting process, decision rules eliminate the variability inherent in individual underwriter decisioning and help:
- Verify interest rate offered does not exceed the maximum allowable for the state;
- Ensure adverse actions indicates the reason for the decline and are sent according to requirements specified by the Truth in Lending Act;
- Set the criteria for both conditions and authorized personnel to allow exceptions or overrides regarding credit policies; and
- Confirm stipulations have been met and supporting documents have been digitally captured and reviewed prior to loan approval.
By coding decision rules into the underwriting process, credit unions can demonstrate that decisions related to regulations such as Regulation-Z of the Truth in Lending Act (TILA) and Regulation B of the Equal Credit Opportunity Act (ECOA) are being applied consistently. In the event of changes to the regulations, credit unions maintain an auditable history of when, where, and by whom decision rules were modified. By removing the variability of manual underwriting decisions, rules accelerate the process and help credit unions remain compliant.
Better Credit Union Risk Management via the Cloud
Credit unions confronted with credit and compliance risk management can gain an upper hand by using cloud-based loan origination solutions. The newest options make deployment quick, include a wide range of optional services to enhance lending efficiency, and can be configured to your institution’s unique underwriting needs.
defi SOLUTIONS provides configurable loan origination systems, loan management and servicing, analytics and reporting, and a wide range of technology-enabled BPO services. If you’re struggling with the limitations of your current lending technology solutions, take the first step to learn how you can manage credit risk more efficiently. Contact our team today or register for a demo.
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