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.

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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.
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impactnow   Time to Reconsider Risk & Reset Loan Decisioning Software   11/28/2011 12:50:08 PM

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.
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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.
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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.
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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.
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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.

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