Today, all businesses strive to be more efficient. Financial institutions are no exception. The goal in small business lending is to push through as many requests as possible 1) without increasing staff, 2) without jeopardizing credit quality or 3) without delaying the approval process.
A tall order!
Many financial institutions decide to go the route of auto decisioning as a way to accomplish all three of the requirements above. Perhaps your bank or credit union is considering this as well. While auto decisioning is an excellent way to gain efficiency, it is not as easy as resetting your gray area strategy. There are several items that must be considered including:
- Definition of auto decision and risk culture
- Data analysis
First, a definition of auto decision:
Replicating the underwriters’ decisioning in an automated fashion using score and other factors with no human intervention in the decision and pricing process. Products and pricing are standardized and set. Decision overrides are limited to no more than 10% by deal volume. Dollar thresholds and products types are typically limited in scope.
The definition above is one of the biggest challenges for most financial institutions and ties into the Culture discussion as well. Is the bank or credit union willing to trust the scorecard and other factors and not “touch” each request? Can the financial institution lock down pricing, as well as product, to avoid potential disparate treatment? What about overrides? Is the financial institution willing to let the system decision stand?
As a bank or credit union, if you are not yet comfortable with having no financial statement credit requests, then you are not ready to auto decision. The recommended progression toward auto decision is a) standardized products, b) standardized pricing, c) a limited group of no financial statement product or dollar thresholds, and then d) auto decisioning. This helps the financial institution build comfort with the product set, pricing and scoring before moving to an “underwriter-free” decisioning model.
In my next blog I will discuss data analysis. What information do you need to create your gray area strategy and other characteristics? Why can’t you auto decision loans on day one?