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Over the past 20 years, institutions have undergone At the same time, technology was making it easier for
massive structural, regulatory, social and technological credit repositories to track and supply consumer credit
changes that have changed the very nature of the information. Decisioning engines were developed that
underwriting function. Recent data indicate that industry could take this credit information, primarily the Fair,
leaders, particularly in the home equity sector, are Isaac and Company FICO score, along with the
relying more heavily on automated systems for their institution’s established lending guidelines and
underwriting and decisioning functions. At the same determine automatically whether a loan or line should be
time, the environment in which lenders operate is accepted, denied or investigated further.
becoming more competitive and may be forcing them
outside the traditional A-paper space into riskier credit Today, automated underwriting engines are used
grades. Lenders are approaching a fork in the road that industrywide on nearly every type of lending product.
will force them to choose to rely more heavily on Additional automation, primarily built into the
human underwriters or on technology to underwrite origination and processing system, makes it possible for
their lending business in the future. The question may processors to complete most applications and shepherd
have serious implications when institutions lose internal them to the closing table without an underwriter ever
underwriting expertise. getting involved.
Copyright © 2005. BenchMark Consulting International NA, Inc. All Rights Reserved
But the fact that a lender uses an automated There is also a positive financial reason that some
underwriting system does not necessarily mean that the lenders, particularly home equity and subprime lenders,
company is making underwriting decisions in an would rather find a way to profit from a riskier deal
automated fashion. There is a clear distinction between through risk-based pricing than to deny the application
auto decisioning and auto recommend. Many lenders outright. Consequently, the lenders will utilize their
assume that since they have an engine that helps them technology to place the loan or line in a gray area and
make decisions that they have auto decisioning in their create an exception for review by an underwriter.
shop. What most actually have is a system that
automatically returns a recommendation. While the Every institution has a different appetite for risk.
system may recommend that a lender approve a deal, a Likewise, each underwriting department is made up of
human underwriter still concurs with the deal before it is professionals with different backgrounds and
approved. experience. Since there is no legal standard for how
these technologies are employed, each institution is free
Automated underwriting systems evaluate all criteria to use them as they see fit. Today, many lenders are
relating to an application and then return one of three using their automated technology to make
recommendations: approve, decline or underwriter recommendations. But that is changing.
review (gray area) that is sometimes referred to as
caution. Auto decisioning systems automatically approve How Lenders Use Technology Today
and or deny applications based on the findings of these
systems and either move them on to the processing While the data generally indicate that the use of
department or send out a rejection letter. The technological systems for auto decisioning is on the rise
exceptions left in the gray area are sent to underwriters. in institutions, that conclusion does not hold generally
All applications that pass through an auto recommend for all lenders. In our own studies of the home equity
system end up on the underwriter’s desk. sector, we received a vast range of responses to our
questions about automated underwriting. Most of the
Lenders are attracted to automatic decisioning because it firms we studied auto decisioned very few of their equity
offers them significant competitive advantages. By applications.
allowing technology to underwrite the majority of the
applications received, lenders can do more with the The data below (see Figure 2) were taken from our most
same number of full time employees, lowering their recent home equity lending program and provide an
fixed expenses. In addition, turnaround times are indication of how lenders are employing their
reduced, allowing the company to move deals to the technology in regards to home equity products.
closing table more quickly than competitors while still
mitigating risk. Five of the anonymous clients represented in the
accompanying table are current home equity sector
leaders. While these companies relied far more heavily
on technology – with two clients handling about half of
their applications in an automated fashion – not all
leaders were operating at this level.
Lender Code 1 2 3 4 5 6 7 8 9 10 11 12
approved 65.6% 68.7% 72.9% 76.1% 70.6% 60.9% 70.8% 68.3% 77.5% 79.1% 70.0% 70.8%
auto-decisioned 52.1% 1.4% 22.6% 11.5% 13.0% 46.2% 0.0% 0.0% 6.1% 0.0% 5.3% 15.8%
auto-approved 52.1% 0.0% 14.5% 8.0% 0.0% 35.3% 0.0% 0.0% 4.3% 0.0% 0.0% 0.0%
auto-declined 0.0% 1.4% 8.0% 3.5% 13.0% 10.9% 0.0% 0.0% 1.9% 0.0% 5.3% 15.8%
booked 53.0% 55.0% 51.4% 65.5% 53.0% 49.9% 66.7% 41.4% 66.9% 68.6% 51.7% 53.5%
Source: 2005 Home Equity BenchMark Program
Figure 2
Jim Leath is the Mortgage and Consumer Lending practice manager at BenchMark Consulting International. He has
extensive background in mortgage and consumer lending, strategic planning, consolidations and corporate restructuring.
BenchMark Consulting International has specialized in improving the financial services industry since 1988. The
company is a management consulting firm that improves the profitability of its financial services clients through the
delivery of management decision making information and change management services to realize the benefits of
business process changes. BenchMark Consulting International’s expertise is in the measuring, designing and managing
of operational processes.
The firm has worked with 36 of the top 50 (in asset size) commercial banks, all 14 automobile captive finance
corporations, several of the largest consumer finance corporations and many regional banks throughout the United
States. Internationally, BenchMark Consulting International has worked with the five largest Canadian commercial
banks, more than 40 European organizations in 11 different countries, in addition to financial institutions in Latin
America, Asia and Australia.
The company is a wholly owned subsidiary of Fidelity Information Services, Inc., with clients in more than 50 countries
and territories, providing application software, information processing management, outsourcing services and
professional IT consulting to the financial services and mortgage industries. BenchMark has dual headquarters in
Atlanta, GA and Munich, Germany. For more information please go to www.benchmarkinternational.com