Spring cleaning, most people don't enjoy it (unless you’re obsessive compulsive – not that there’s anything wrong with that), but it’s hard to not enjoy the benefits. Reduced clutter, more opportunity to utilize that free space and a tidier living area – these are the end goals.
Now is also the time to do some spring cleaning or evaluations regarding the efficiency and performance of your indirect lending program. Below, we have provided the five most common mistakes lenders make when operating their indirect lending programs:
- Too many rules: The underwriting process is often governed by a substantial number of rules or decisioning parameters. Having too many makes it very hard to measure the effectiveness of a single rule and foresee any associated risk. An optimization of the process could be very productive in both lowering the risk and increasing performance.
- Lack of auto-decisioning: Ideally, auto-decisioning saves you time and operations costs associated with being dependent on human action. It makes sense not to waste time on applications you know have very little chance of being approved, so this is where auto-decisioning is a tremendous benefit. It also is a tremendous help should your institution ever be audited by regulators. When risk is either very low or very high, the auto-decisioning approach must consistent. This will increase the efficiency of the process, reduce the risk, and increase the margin.
- Lack of risk models: For auto-decisioning to be ideal, it’s essential to have solid statistical models to predict risk. Estimating the cost associated with risk and setting score cut-offs on both sides (approvals and declines) is a significant milestone. Score cut-offs must be based on the strategic business goals and risk appetites of the institution. But to make this happen, it’s necessary to have solid statistical measures in place.
- Incorrect score cut-offs: It’s also common for the design of the process to be structured so that multiple sets of rules and criteria overlay the underwriting risk score so that the score no longer corresponds to the intended risk appetite. A proper adjustment in score tiers and cut-offs should be made to better align the risk appetite and the loan pricing.
- Obsolete loan software: Many financial institutions fail to realize their loan software is obsolete and holding them back. Inferior platforms do not permit the necessary flexibility and performance that is often required now. A modern loan software solution with a flexible workflow and strategy design is a must to drive profits and outperform the competition.
Indirect lending success often hinges on finding the right mix of technology to compliment a financial institution's strategies and goals. This is where analytics and business consulting can be crucial towards ensuring everything aligns from policies, procedures and rates to how the loan origination system is configured to deliver results.
MeridianLink' MLX Consulting team recently hosted a webinar regarding the fundamental need of data analytics for indirect lending programs. If this is something you'd like to learn more about, please click the button below to request a link to the webinar recording.
Photo Credit: Alan Levine