Representation of contract signing at the end of the loan origination process

HOW AUTO DECISIONING IMPACTS LENDING PRACTICES

The defi Team Banking, Compliance, defi INSIGHT, Originations

Auto decisioning improves loan outcomes

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 without human intervention. Quick decisions increase your chances of improving your application to approval to booking ratios.

Benefits of Auto Decisioning in Lending
1. Near-immediate lending decisions that improve the buying experience
2. Improved ability to compete compared with lenders who still rely on manual processes
3. Lowering overall underwriting costs by replacing manual underwriting steps with automation
4. Consistently executed underwriting steps and decisions supporting compliance

Auto Decisioning Improves the Buyer Experience

Most Americans are not big fans of the vehicle-buying process. In 2023, 7% of vehicle buyers completed 100% of the buying steps online, 43% completed steps in a mix of online and in-person, and half completed all the steps in person, according to a survey by Cox Automotive.

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 makes lenders 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.

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. This data paints a more detailed and accurate picture of applicant creditworthiness. This complementary information lets a lender assess risk levels and make more confident lending decisions.

For example, an applicant’s FICO score is 680, but the lender would like greater assurance regarding the 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 payment 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
  • or else send the application to an 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 the performance of their current portfolios, determining which borrower characteristics correlate with the ability to pay, determining the degree of risk they’re willing to assume, and then employing 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 must 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 to reflect 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 in a modern loan origination system make you far more efficient and competitive in lending. We’ve provided relatively simple and straightforward examples of auto decisioning, but decision rules have the power to automate complex underwriting processes. They can be used to calculate multiple financial ratios and deal structures based on many data sources—standard and alternative—and deliver a higher return on investment with lower risk compared to manual underwriting processes.

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 banking fraud detection, contact our team today and learn how our cloud-based loan origination products can transform your business.

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