Time to Reconsider Risk & Reset Loan Decisioning Software

Mary E. Shacklett, President, Transworld Data | 11/21/2011 | 11 comments

Mary E. Shacklett
Banks commit considerable effort to the task of determining who gets what loan and under what conditions. The goals are to ensure that the process of loan determination is uniform and that it complies with both regulations and bank lending policy. This is why most banks have consolidated their lending departments, and why they use analytics software to assist loan officers in the loan determination process.

In fact, loan "decisioning" software was one of the first "smart analytics" solutions to be deployed in banks and credit unions. For over 20 years, it has delivered consistent results and value. The software, of course, isn’t any smarter than the lending guidelines that banks and credit unions program into it, but what it does guarantee is a uniform administration of lending, no matter which loan officer is using it.

Loan decision-making software operates on business rules defined by lending managers. Will loans be limited to Class A borrowers with great credit histories and low risk? Or will loans also be extended to lower-quality borrowers -- at higher interest rates to compensate the financial institution for the higher risk?

Lately, these lending guidelines have been tight, and lending officers have been operating at low risk. They don't use their own personal judgment when assessing loan requests; they simply run the analytics and come back with a "yes" or "no." Financial institutions also use this software to run pre-approvals on loan and credit card offerings -- and there are some cases where online lending companies actually use the automated decisioning software to approve loans on the spot.

Yet how does this well established analytics system fit within the the framework of long-term customer service? Automated decision-making will consistently give great service to "A" borrowers with all kinds of financial assets and a stellar borrowing record that goes on for years. However the software may give inconsistent, less than stellar service to customers who are just starting out on their first job and are struggling to establish credit.

Banks and credit unions used to aggressively address this younger segment of their customer and member bases by reaching out to the "un-banked" -- lower-income people who still paid all of their bills -- and to the younger people who were just starting out. However in the wake of an economic bust that was largely caused by loose lending, these outreach efforts have stopped. This has brought on conservative lending practices and left behind many worthwhile borrowers and small businesses.

One key way to rebuild the economy may well be to augment recent policy so that people early in their financial and credit careers can obtain loans. Borrowers could start building great credit records, and lending institutions could get renewed opportunities to build their customer and member bases for the future. (The average credit union member today is already in his mid-forties, so new customers are essential.)

So perhaps it is time for financial institutions to alter the policies that their decision-making software is using and decrease their reliance upon the software. Certainly this software will continue to mitigate the risk of lending to unproven groups of borrowers, but it is not a complete substitute for policy, strategy, and customer service.

View Comments: Newest First | Oldest First | Threaded View
Page 1 / 2   >   >>
impactnow   Time to Reconsider Risk & Reset Loan Decisioning Software   11/29/2011 11:28:30 AM
Loan decisions

Mary thanks it should be a great indicator of how our economy will do when the money is drying up so will jobs spends etc. It should be evaluated at least monthly and the Fed should understand its impact on their decision and rate basis.

Mary E. Shacklett   Time to Reconsider Risk & Reset Loan Decisioning Software   11/28/2011 4:18:02 PM
Re: Risk
They do have these records, impactnow, but I  do not recall look-backs at the reject rate ever being a high priority.
User Ranking: Blogger
impactnow   Time to Reconsider Risk & Reset Loan Decisioning Software   11/28/2011 12:50:08 PM
Risk

Mary it would be interesting to see how banks evaluate the software decisions for example percentage of loans rejected etc. These would be interesting numbers for the government to evaluate as we struggle to get out of this recession.

Mary E. Shacklett   Time to Reconsider Risk & Reset Loan Decisioning Software   11/26/2011 3:34:05 PM
Re: Do the banks share credit history of their customers?
No, Umair, they do not.

Each bank has its own decisoning software and runs its analytics independently.
User Ranking: Blogger
Umair Ahmed   Time to Reconsider Risk & Reset Loan Decisioning Software   11/26/2011 3:45:33 AM
Do the banks share credit history of their customers?

This is why most banks have consolidated their lending departments

@ Mary, does this means that banks share the credit history of their customers with each other? I m confused

Mary E. Shacklett   Time to Reconsider Risk & Reset Loan Decisioning Software   11/22/2011 8:30:58 AM
Re: Loan software
In most cases now, David,  lending staff adheres to the computer software's  decision.
User Ranking: Blogger
Mary E. Shacklett   Time to Reconsider Risk & Reset Loan Decisioning Software   11/22/2011 8:28:46 AM
Re: Loan software
A good point, Sara.

There should be a balance, but what scares me  when I consult in the workplace is that the level of critical thinking/discernment is significantly lower than what it was even ten years ago.

I don't know if this is due to shortfalls in education or what--but there seem to be fewer pepole able to make the decisions without software (or something) telling  them what to do.
User Ranking: Blogger
Mary E. Shacklett   Time to Reconsider Risk & Reset Loan Decisioning Software   11/22/2011 8:23:29 AM
Re: Loan software
Yes, definitely it appears that the pendulum has swung too much  the other way now.
User Ranking: Blogger
David Wagner   Time to Reconsider Risk & Reset Loan Decisioning Software   11/21/2011 6:49:10 PM
Re: Loan software
Seems to me the software doesn't enter into it. If the software responds to the criteria set by the bank, rather than jury-rigging the results after to software says no (a dangerous thing to do), maybe banks just need to lessen their criteria in the software.

this reminds me of the various computer and points systems used in sports like the BCS or the NASCAR Sprint Cup. Every year, it seems, we screw around with the formula to get what humans though should have been the answer. Either you've got an objective set of criteria you want a computer to analyze in which case you should stick to the formula or you've got humans wanting a certain outcome in which case, you should ignore the computers.

Just messing with the computer every year to get the reult you hoped for undermines the power of the computer and does what you wanted to begin with. We could save a lot of time and hassle if we just got rid of the ocmputers if we arne't oing to listen to them.
Sara Peters   Time to Reconsider Risk & Reset Loan Decisioning Software   11/21/2011 4:01:26 PM
Re: Loan software
@impactnow  I agree, that there's a happy medium in there somewhere and we need to find it. And it's not just the happy medium between high-risk lending and no-risk lending. It's also the happy medium between using software to help make decisions and leaving decisions entirely to the software. I wonder which one of these balancing acts is actually the most important.

 
Page 1 / 2   >   >>


The blogs and comments posted on EnterpriseEfficiency.com do not reflect the views of TechWeb, EnterpriseEfficiency.com, or its sponsors. EnterpriseEfficiency.com, TechWeb, and its sponsors do not assume responsibility for any comments, claims, or opinions made by authors and bloggers. They are no substitute for your own research and should not be relied upon for trading or any other purpose.

More Blogs from Mary E. Shacklett
Mary E. Shacklett   12/7/2011   7 comments
The promise of internal cloud infrastructures for organizations rests in a much hoped for seamless ability to traverse heterogeneous operating systems and hardware platforms, delivering ...
Mary E. Shacklett   12/5/2011   8 comments
Companies have recognized that they need to function 24/7 in a global economy -- and that they can ill afford to experience disasters and outages. This has given some "lift" to disaster ...
Mary E. Shacklett   12/2/2011   6 comments
Nothing is more important than your disaster recovery (DR) and business continuation plan when you really need it -- but the odds are pretty high that you never will. Hardly anyone ever ...
Mary E. Shacklett   11/29/2011   35 comments
CIOs have to know the business and how IT delivers value, but they also have to understand enough of the technology to inspire and earn the respect of their staff. Where is the fine line ...
Mary E. Shacklett   11/23/2011   24 comments
Right now, companies are striving to get their arms around real-time analytics and what it can mean for their businesses, but fraud detection software has been working in real-time for ...
Latest Archived Broadcast
We talk with Bernard Golden about accelerating application delivery in the cloud.
On-demand Video with Chat
Register for this video discussion to learn how tablets can provide true business usability and productivity.
E2 IT Migration Zones
IT Migration Zone - UK
Why PowerShell Is Important
Reduce the Windows 8 Footprint for VDI
Rethinking Storage Management
IT Migration Zone - FR
SQL Server : 240 To de mémoire flash pour votre data warehouse
Quand Office vient booster les revenus Cloud et Android de Microsoft
Windows Phone : Nokia veut davantage d'applications (et les utilisateurs aussi)
IT Migration Zone - DE
Cloud Computing: Warum Unternehmen trotz NSA auf die „private“ Wolke setzen sollten
Cloud Computing bleibt Wachstumsmarkt – Windows Azure ist Vorreiter
Like Us on Facebook
Twitter Feed
Enterprise Efficiency Twitter Feed
Site Moderators Wanted
Enterprise Efficiency is looking for engaged readers to moderate the message boards on this site. Engage in high-IQ conversations with IT industry leaders; earn kudos and perks. Interested? E-mail:
[email protected]
Dell's Efficiency Modeling Tool
The major problem facing the CIO is how to measure the effectiveness of the IT department. Learn how Dell’s Efficiency Modeling Tool gives the CIO two clear, powerful numbers: Efficiency Quotient and Impact Quotient. These numbers can be transforma¬tive not only to the department, but to the entire enterprise.

Read the full report
The State of Enterprise Efficiency in the Virtual Era: Virtualization – Smart Approaches to Maximize Gains
Virtualization is a presence in nearly all enterprise data centers. But not all companies are using it to its best effect. Learn the common characteristics of success, what barriers companies face, and how to get the most from your efforts.

Read the full report
Informed CIO: Dollars & Sense: Virtual Desktop Infrastructure
Cut through the VDI hype and get the full picture -- including ROI and the impact on your Data Center -- to make an informed decision about your virtual desktop infrastructure deployments.

Read the full report
SPONSORED BY DELL
CASE STUDIES
EBOOKS
PUBLIC SECTOR RESOURCES
VIDEOS
WHITE PAPERS
WINDOWS SERVER 2012 RESOURCES
A Video Case Study – Translational Genomics Research Institute
e2 Video


On the Case
TGen IT: Where We're Going Next

7|11|12   |   08:12   |   10 comments


Now that TGen has broken new ground in genomic research by using Dell's storage, cloud, and high-performance computing solutions, the company discusses what will come next for it and for personalized medicine.
On the Case
Better Care Through Better Communications

6|6|12   |   02:24   |   11 comments


The achievements of the TGen/Dell project could improve how all people receive healthcare, because they are creating ways to improve end-to-end communication of medical data.
On the Case
TGen IT: Where We Are Now

5|15|12   |   06:58   |   6 comments


TGen is breaking new ground in genomic research by using Dell's storage, cloud, and high-performance computing solutions.
On the Case
TGen IT: Where We Were

4|27|12   |   06:45   |   10 comments


The Translational Genomics Research Institute wanted to save lives, but its efforts were hobbled by immense computing challenges related to collecting, processing, sharing, and storing enormous amounts of data.
On the Case
1,200% Faster

4|18|12   |   02:27   |   12 comments


Through their partnership, Dell and TGen have increased the speed of TGen’s medical research by 1,200 percent.
On the Case
IT May Improve Children's Chances of Survival

4|17|12   |   02:12   |   8 comments


IT is helping medical researchers reach breakthroughs in a way and pace never seen before.
On the Case
Medical Advances in the Cloud

4|10|12   |   1:25   |   5 comments


TGen and Dell are pushing the boundaries of computing, and harnessing the power of the cloud to improve healthcare.
On the Case
TGen: Living the Mission

4|9|12   |   2:25   |   3 comments


TGen's CIO puts the organizational mission at the heart of everything the IT staff does.
On the Case
TGen Speeding Up Biomedical Research to Save More Lives

4|5|12   |   1:59   |   6 comments


The Translational Genomics Research Institute is revamping its computing to improve speed, storage, and collaboration – and, most importantly, to save lives.
On the Case
Computing Power Helping to Save Children's Lives

3|28|12   |   2:13   |   3 comments


The Translational Genomics Institute’s partnership with Dell is enabling them to treat kids with neuroblastoma more quickly and save more lives.
Tom Nolle
The Big Reason to Use Office

3|18|14   |   02:24   |   46 comments


Office and personal productivity tools come in a first-class and coach flavor set, but what makes the difference is primarily little things that most users won't encounter. What's the big issue in using something other than Office, and can you get around it?
E2 Editors
SPONSORED: Mobile Security — A Use Case

3|4|14   |   04:27   |   16 comments


New mobile security solutions can accommodate a wide array of needs, including those of a complex university environment.
Tom Nolle
Killing Net Neutrality Might Save You Money

1|16|14   |   2:13   |   16 comments


The DC Court of Appeals voided most of the Neutrality Order, and whatever it might mean for the Internet overall, it might mean better and cheaper Internet VPNs for businesses.
Tom Nolle
The Internet of Everythinguseful

1|10|14   |   2:18   |   19 comments


We really don't want an "Internet of Everything" but even building an Internet of Everythinguseful means setting some ground rules to insure there's value in the process and that costs and risks are minimized.
Tom Nolle
Maturing Google Chrome

12|30|13   |   2.18   |   25 comments


Google's Chrome OS has a lot of potential value and a lot of recent press, but it still needs something to make it more than a thin client. It needs cloud integration, it needs extended APIs via web services, and it needs to suck it up and support a hard drive.
Sara Peters
No More Cookie-Cutter IT

12|23|13   |   03.58   |   21 comments


Creating the right combination of technology, people, and processes for your IT organization is a lot like baking Christmas cookies.
Sara Peters
Smart Wigs Not a Smart Idea

12|5|13   |   3:01   |   46 comments


Sony is seeking a patent for wigs that contain computing devices.
Tom Nolle
Cloud in the Wild

12|4|13   |   02:23   |   15 comments


On a recent African trip I saw examples of the value of the cloud in developing nations, for educational and community development programs. We could build on this, but not only in developing economies, because these same programs are often under-supported even in first-world countries.
E2 Editors
SPONSORED: Is Malware Evading Your IPS?

11|18|13   |   03:16   |   4 comments


Intrusion prevention software is supposed to detect and block malware intrusions, but clever malware authors can evade your IPS in these five main ways.
Sara Peters
Where Have All the Mentors Gone?

9|27|13   |   3:15   |   38 comments


A good professional mentor can change your life for the better... but where do you find one?
Tom Nolle
SDN Wars & You Could Win

9|17|13   |   2:10   |   5 comments


VMware's debate with Cisco on SDN might finally create a fusion between an SDN view that's all about software and another that's all about network equipment. That would be good for every enterprise considering the cloud and SDN.
Ivan Schneider
The Future of the Smart Watch

9|12|13   |   3:19   |   39 comments


Wearing a bulky, oversized watch is good training for the next phase in wristwatches: the Internet-enabled, connected watch. Why the smartphone-tethered connected watch makes sense, plus Ivan demos an entirely new concept for the "smart watch."
Tom Nolle
Cutting Your Cloud Storage Costs

9|4|13   |   2:06   |   3 comments


Cloud storage costs are determined primarily by the rate at which files are changed and the possibility of concurrent access/update. If you can structure your storage use to optimize these factors you can cut costs, perhaps to zero.
Sara Peters
Do CIOs Need an IT Background?

8|29|13   |   2:11   |   23 comments


Most of the CIOs interviewed in the How to Become a CIO series did not start their careers as IT professionals. So is an IT background essential?
Ivan Schneider
The Internet Loves Birthdays

8|27|13   |   3:25   |   69 comments


The Internet has evolved into a machine for drumming up a chorus of "Happy Birthday" messages, from family, friends, friends of friends who you added on Facebook, random people that you circled on G+, and increasingly, automated bots. Enough already.