From the time a subprime consumer applies for a loan until the moment of funding, the underwriting process can be a perilous journey. Loan defaults cost subprime lenders over $12 million in January alone, according to alternative credit reporting bureau Clarity Services.
With more loans being issued for increasingly larger amounts, the need to properly manage risk has never been greater. From 2014 to 2015, Clarity data shows an increase of 66 percent in the number of loans issued, with a 163 percent jump in the dollar value of loans during the same period.
Lenders of all sizes and across all industries are scrambling to find reliable ways to mitigate both known and hidden risks without sacrificing speed or customer service.
Re-Thinking Successful Underwriting
Underwriting can mean different things to different lenders. Whether it involves using a sophisticated system of credit data reports, or simply checking the lender’s own internal records, the goal is the same: confirm identity, avoid fraud and, hopefully, recover the funds as agreed.
However, in an effort to meet lofty sales or revenue goals, it is possible to approve the wrong applicants or take on too much risk – leaving lenders open to an increasing default rate and, ultimately, the loss of revenue.
Finding a way to standardize the process is key. Alternative credit bureaus can provide cross-industry visibility into a consumer’s credit activity, including current obligations and recent credit inquiries. This is especially important, since consumers with eight inquiries in the past 30 days have a default rate of 56 percent!
“While underwriting is not a marathon, it’s also not a sprint,” said Clarity CEO Tim Ranney.
“Despite market pressures to move quickly, the most successful lenders blend agility with the right underwriting tools for risk management.”
Cover the Whole Journey, Not Just the Beginning
There are many types of solutions to cover the early stages of underwriting. A credit report will show a lender whether an applicant is creditworthy and how well they’ve managed debt in the past. When an applicant’s history has been considered and a preliminary decision has been made, the process is usually considered finished. But is it?
Let’s say a lender’s standard practice is to fund loans at closing time as part of a daily batch. A lender can approve an applicant at 10 a.m., and that transaction will fund at 6 p.m. and be reported to the credit bureau as a tradeline.
The question is, what did the customer do in the hours between 10 a.m. and 6 p.m.? Was that window used to apply for another loan?
Clarity’s internal data shows that consumers with one or more additional credit inquiries within 24 hours following initial underwriting are nearly 40 percent more likely to default on the loan.
There is an extra step that could save a lender thousands. Clarity developed a final checkpoint in the underwriting journey. Just before a loan is officially funded, the lender can take a “last look” at the applicant to make sure their credit history hasn’t changed since they first applied.
A lot can happen in the hours between initial underwriting and funds dispersal. Clarity’s data shows that 51 percent of loans had multiple inquiries after the initial stages of underwriting were complete.
While concerning, it is possible that in some cases the additional inquiries may be a result of lead generation companies saturating the market, and may not actually represent new consumer inquiries. Taking a last look can help lenders avoid losing legitimate business over a perceived threat that later proves false.
Of course, this last look is only effective if the lender covered all of the basic questions of early underwriting. Was the applicant’s identity verified? Did they trigger any fraud alerts? These are important questions to answer early.
But lenders no longer have to stop there. Cover the entire underwriting journey by taking a last look before the funds go out the door.
Written by Tim Ranney.
Tim Ranney is president and CEO of Clarity Services, Inc., a real-time credit bureau providing credit-related data on subprime consumers. Prior to founding Clarity in 2008, Ranney spent 20 years as a leader in internet security and risk management, serving as COO of an industry leader and senior executive for both Network Solutions and VeriSign.