Is Automated Loan Decisioning The Right Strategy For Lenders?

Automated Credit & Loan Decisioning

Many financial institutions receive thousands of applications daily, depending on their size and the economy’s current health. A lending staff is responsible for processing these loan applications to determine who qualifies as a potentially good candidate.

A loan application includes various personal finance information that reflects the creditworthiness and credit risk of the applicant in question. Managing the entire loan process can be exhausting and time-consuming if done by manual review. In actuality, this hand-by-hand process isn’t possible for most financial institutions — at least not at the beginning stages of the decisioning process.

Automated loan decisioning intelligence can help, but is it the right strategy for a lending business and its customer management process?

What Is Automated Loan Decisioning?

Automated loan decisioning uses a loan processing algorithm built on the latest cloud and decisioning engine technology to digitize and streamline the loan application process. In addition, the software delivers decisioning automation capabilities which reduce paperwork and wasted time and ideally minimize human error.

Lenders, such as credit unions and banks, can customize the parameters loan applications must meet for the potential customer to move on to the next step. The engine’s automated solutions allow applications to be reviewed and considered faster and more accurately. This efficiency increase enables those who qualify as potential borrowers to be passed on to the underwriter and the human judgment phase.

The Pros of Automated Loan Decisioning 

When executed properly, automated loan decisioning software can offer credit unions many benefits, including:

  • Increased efficiency with better management and tracking of documents
  • Lowered processing and decision-making time 
  • Enhanced relationships among team members
  • Reduced underwriting costs
  • More free time for staff to spend on other administrative tasks
  • Increased approvals and captures
  • More personalized customer experience

Loan decisioning can also help mitigate risk by analyzing data sources to a deeper degree than possible by an underwriter themself.

The National Credit Union Administration (NCUA) identifies seven codependent risk categories for lending.  These include credit risk, transaction risk, liquidity risk, interest rate risk, compliance risk, reputation risk, and strategic risk.

Credit Risk 

Since there is no upfront human involvement in an automated lending process, the chance of error is significantly reduced. This increases consistency and mitigates the lending company’s vulnerability to credit risk. 

With automation, lending companies can track and monitor loans and loan applicants more effectively. Automated solutions enable a credit union, bank, or other lending entity to respond more quickly with appropriate loan offers or decisions. This, in turn, helps them attract profitable applicants and provide instant decisions to customers.

Compliance Risk 

Lending companies can develop an established risk management business strategy through loan decisioning software to help them offer the right options to consumers. This is a crucial part of reducing compliance risk. 

In addition, reduced human interaction also means lower chances of noncompliance or preferential treatment to applicants from certain groups. Discriminatory lending practices are taken seriously in court, and human lenders sometimes make decisions based more on feelings than facts. Automated loan decisioning software can reduce the risk of accidental discrimination within your lending business and keep you on the right side of the law. The need to properly assess risk doesn’t always come from the borrowers’ side but instead internally.

Operational Risk 

When implementing scoring models, automated loan decisioning software helps ensure that nothing is missed in the lending process. Auto-decisioning lowers human involvement and enables companies to measure and monitor the accuracy of implemented models and scores. Moreover, reduced human interaction also lowers the application cost for each loan.

Strategic Risk

Lending companies have to align their underwriting decisions with their risk policy. If your risk policy changes, your underwriting decision-making process must change. With auto-decisioning, you need only change a few settings to update your approval process rather than trying to change the behavior of an entire team of people.

Using an automated loan decisioning platform also improves customers’ interaction with lending companies. With auto-decisioning, borrowers can easily apply for a loan online in just a few minutes without talking to anyone or making their way into an office.

Potential Downsides of Automated Loan Decisioning

Automated loan decisioning is not an autopilot solution for determining which candidates are good customers and which don’t. A decisioning platform is only as good as the human-determined criteria put in place — meaning, the credit risk factors and grading scorecard that a company puts in place are responsible for the outcomes the software delivers.

This highlights the importance of using automated loan decisioning properly to ensure compliance and avoid any chance of discrimination. If you set guidelines for your loan decisioning software incorrectly or set poor guidelines, you may violate lending laws.

Moreover, lenders should monitor, measure, and track the progress of their automated loan-decisioning software. Any anomalous behavior should be caught right away and addressed thoroughly.

Another thing to know is that automated decisioning doesn’t necessarily guarantee better decisions. It’s only as good as the rules set for it. Think carefully about the guidelines you set for your software before implementing them.

What’s Right for Your Lending Company 

Every lending company has operational needs, so no tool is right for everyone.

If you’re excited about the possibility of automated loan decisioning, think critically about how you can implement fair guidelines. Also, monitor, evaluate, and optimize your strategy so that you can tweak it along with trend changes, qualifying metrics, and business requirements.

Evaluate your company’s needs and determine if an automated solution will help achieve them; the next step is to find the right decisioning software to fit your business model. 

Automated Loan Decisioning Software to Trust 

Loan decision-making is a complex process. Lending companies are responsible for developing lending standards, performing rigorous research about every potential client, and applying those standards consistently to every application they receive.

Identifying the most suitable applications, narrowing down the options, and handling the paperwork are very labor-intensive. Luckily, automated loan decisioning software can help you reduce your workload. 

But how do you know which loan decision-making software you can trust?

GDS Link is a good place to start. The platform provides solutions, analytics, and advice around credit risk management and decision-making processes. With the help of efficient AI-powered decisioning, lending companies can make consistent, informed decisions with full confidence.

Our analytics and decisioning software provide access to more than 200 unique data sources that companies can use to understand a customer’s financial profile and make better choices. Connect with us today to get started.

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