Open banking is the way forward for improved underwriting, says Neil Williams, managing director of Lending Metrics.
The reality of underwriting is that some mortgage lenders are still stuck in the Stone Age. You might think this is overstating it a bit but how many lenders still rely on paper bank statements and manual processes when making lending decisions?
In the age of Big Data, when terabytes of data are accumulated on a daily basis, there remain lenders employing, collectively, thousands of underwriters who manually pour over paper copies of utility bills and bank statements.
Why is this still happening? The short answer is that expert IT is not in plentiful supply at most lenders. To move from a legacy system of manual proofing to software utilising open banking is not something you can do in-house overnight.
Your IT resource will have to spend months planning and implementing the change. Even then – as last year’s TSB debacle goes to prove – things can still go horribly wrong. Who can blame some CEOs for hesitating when the potential downside of reshaping their back office can be huge. Such delay cannot continue for much longer – given the seismic improvement in underwriting quality and massive cost savings that new technology is capable of delivering.
Until recently, lenders only had ‘credit history’ and ‘historic’ proofs of status – a print out of a bank statement, a pay slip, and proofs of address on documents. All these ‘indications’ are time-consumingly produced by the applicant and worryingly vulnerable to fraud.
For a price, lenders can access information periodically provided by the major banks about individuals’ income, but even this is not definitive. Thankfully, open banking means an end to all this. No more over-reliance on credit history and paper proofs. And, significantly, no more need to estimate a person’s ability to afford the mortgage they are applying for.
Sharing customer data
Open banking requires banks to share their detailed customer statement data with other parties.
This treasure trove – which has always been jealously guarded by the major banks – is now available to all lenders (with the agreement of the finance applicant) via Account Information Service Providers (ASIP).
So, with an applicant’s permission, months of transactions can be captured. Read-only data comes directly from the bank that holds the current account to the ASIP. And it is supplied in real time.
Someone applies for a loan, agrees to a limited timeframe and read-only access to their accounts, and thousands of lines of transactions can be analysed. In milliseconds, this can pull out salary details and all financial commitments, to be tested by algorithms to determine whether the loan should be granted or not.
With open banking, lenders – for the first time – can make an affordability assessment that is extremely accurate.
Real-time data and subsequent analysis provides insights that often the borrower will be ignorant of. The technology can pick up on things that would otherwise be overlooked: patterns that if continued would lead to budgeting problems, such as spending that indicates a gambling habit.
The technology can place the lender’s own rules around the raw intelligence. There is either a ‘decline’ or ‘referral’ outcome. With referrals, instead of the underwriter going through a long list of standard ‘tasks’, only those tasks relevant to the applicant are flagged.
Most lenders will admit that, while they might have a team of say 10 underwriters, six may be following the lead of three experienced employees who know the scorecard inside out.
This creates a big potential for oversight or mistakes. Auto-decisioning means an end to this. Indications of fraud are better detected and quickly picked up by the technology.
Loan management is made much easier. Open banking means a borrower’s bank transactions are usually obtainable within a 90-day timeframe, so, if a first payment is missed, a request payment call can be timed when there is sufficient funds in an account.
Collection rates can be improved by only phoning late payers with sufficient money in their account.
Signs of stress can be straightforwardly picked up. A monthly check can trigger conversations with those borrowers struggling with managing their finances. Payments can then be reorganised rather than missed.
Ah, I hear you say, the downsides remain. And then there is the question of implementation timescale and IT expertise availability. Well, neither of these need apply any longer.
There are platforms – such as LendingMetrics’ OpenBankVision (OBV) – that are available off-the-shelf. They can be ‘white labelled’ and made to work for you within hours.
We can have OBV working on the day a contract is signed.
Such platforms have the benefit of being tried and tested. They are already in use by ‘early-adopter’ lenders.
The platform could even be free (OBV is). I am often asked for ‘proof of concept’ or a trial, because lenders are concerned about the costs of auto decisioning.
I have to repeat to them – because they find it hard to believe – that our platform can be used free, with no minimum usage or ongoing charges. (We derive our profit from selling parallel services.)
With us, there is no commitment and no cost. The lenders that are using this sort of knowhow have been able to rationalise their underwriting resource, improve decisioning and take the brakes off any growth that might have been choked-off by manual processes.
So, for those who have yet to make the leap, all I can say is, as time moves on, you will become increasingly disadvantaged. Can you really afford not to embrace change?
Originally published on:
Mortgage Finance Gazette, March 2019