HOW LOAN ORIGINATION BUSINESS RULES REV AUTO LENDING

Advancements in fintech are transforming loan origination into an increasingly-automated process. Loan applications are now often turned into booked loans with little to no intervention from an underwriter. Underlying this automation is a set of loan origination business rules. In their simplest form, rules are comparisons of numbers and attributes against a lender’s credit policies. That’s what determines if an applicant qualifies for a loan and drives the loan origination process. More sophisticated rules may be used to structure appropriate deals automatically.  

The greatest value of loan origination business rules is the ability to eliminate repetitive manual underwriting steps and significantly accelerate loan decisioning. In a very competitive lending market, decision speed can a true differentiator.  

Loan origination business rules can be used throughout the loan origination process. Let’s look at two in particular: Decisioning and structuring.

Loan Origination Business Rules Support Better Qualifications  

Credit scores provide the highest level filter for qualifying applicants. If you’re focused on the subprime market segment, business rules let you establish credit score thresholds for applications you’re willing to consider, and for those that move immediately into the auto-decline process. At this level, business rules allow you to decide immediately and to focus your underwriting process on applications in your target segments.

Once you’ve made the initial decision on applications you’re willing to consider, business rules can give you a more detailed evaluation of an applicant’s financial strength. Consider a few decision scenarios that can be automated using loan origination business rules, such as borderline credit scores.

Borderline Credit Scores: Risk or Opportunity

An applicant who just clears the threshold of your subprime credit policies presents a potentially higher risk than an applicant at the top of the lending tier. However, credit scores are only a snapshot in time. They don’t always paint an accurate current financial picture. Combining loan origination business rules with alternative credit data helps you make better-informed lending decisions.

Business rules can initiate an automated call to alternative credit data sources that aggregate consumer payment data such as utility, cable, and cell phone payments; rental history; and change of address, and package that information for lender use. Lenders may apply loan origination business rules to these data to rapidly disqualify or qualify applicants.

Business rules may be created so that when one or more of these typical conditions are true, the application results in a decline:

• Three or more change of address during the last 3 years
• Rental payments late 4 or more times during the last 24 months
• Cell phone payments late 1 or more times during the past 12 months

Alternatively, when loan origination business rules applied to alternative credit data indicate an applicant has better financial standing (no late payments, stable address) than a credit score alone would indicate, lenders gain greater confidence in structuring a deal that closely matches the applicant’s ability to repay. Without the benefit of loan origination business rules evaluating alternative credit data, a lender would forego a lending opportunity or offer a less-than-competitive deal.

Loan Origination Business Rules Structure a Deal

Auto structuring is one of the most powerful uses of business rules. When a lender receives an application that initially fails credit policies, auto structuring uses business rules to modify terms with the goal of matching one or more credit policies. A lender creates the business rules that drive the auto structuring process. Loan terms are incremented or decremented at each iteration and then compared against credit policies to determine if there is a match. For example:

• Increase downpayment by increments of $500
• Reduce monthly payment by 5% with DTI ratio cap of 15%
• Increase loan term by 3-month increments with a maximum of 84 months
• Decrease monthly payment by $50 while increasing interest rate by 0.25%

Auto structuring follows a waterfall looping process to ensure that business rules are systematically and consistently applied. Business rules can also require stipulations as part of conditional loan approvals. When there’s a match, auto structuring can immediately return a deal. If auto structuring fails to match any credit policies, it initiates an auto decline.

Lending professionals have tremendous flexibility to create business rules that alter and return deal structures in seconds—iterations that would typically require underwriter reviews. Auto structuring frees underwriters to focus on applications that truly require their expertise and experience to reach lending decisions.

Configurable Business Rules via Modern, Cloud-based LOS

A modern, cloud-based loan origination solution makes it easy to create business rules to automate the process. Configuration menus let lending professionals select applicant attributes, choose comparison criteria and determine the next steps in the process using common click, drag, and drop methods. Business rules can be just as easily modified as credit policies change.  

Loan origination business rules are one of the best ways to rev your auto lending process. You’ll create rules optimized for your specific lending practice and cut manual underwriting steps. The result: Faster, consistent decisions that improve lending efficiency and opportunity.