The gray areas....
Automatic Underwriting in Home Equity: Preparing for Opportunities in the Gray Area
Jim Leath
BenchMark Consulting International
http://www.benchmarkinternational.com/Articles/Automatic%20Underwriting%20in%20Home%20Equity.pdf
Over the past 20 years, institutions have undergone massive structural, regulatory, social and technological changes that have changed the very nature of the underwriting function. Recent data indicate that industry leaders, particularly in the home equity sector, are relying more heavily on automated systems for their underwriting and decisioning functions. At the same time, the environment in which lenders operate is becoming more competitive and may be forcing them outside the traditional A-paper space into riskier credit grades. Lenders are approaching a fork in the road that will force them to choose to rely more heavily on human underwriters or on technology to underwrite their lending business in the future. The question may have serious implications when institutions lose internal underwriting expertise
Automated Decisioning on the Rise
The trend toward greater levels of automated decisioning in the institution is well documented and expected to continue. In BenchMark’s home equity lending program the numbers clearly indicate that auto decisioning is on the rise, especially among the industry’s leaders. ..........But the fact that a lender uses an automated underwriting system does not necessarily mean that the company is making underwriting decisions in an automated fashion. There is a clear distinction between auto decisioning and auto recommend. Many lenders assume that since they have an engine that helps them make decisions that they have auto decisioning in their shop. What most actually have is a system that automatically returns a recommendation. While the system may recommend that a lender approve a deal, a human underwriter still concurs with the deal before it is approved. Automated underwriting systems evaluate all criteria relating to an application and then return one of three recommendations: approve, decline or underwriter review (gray area) that is sometimes referred to as caution. Auto decisioning systems automatically approve and or deny applications based on the findings of these systems and either move them on to the processing department or send out a rejection letter...
Implications for the Future
Since the largest home equity firms appear to be embracing auto decisioning most rapidly, it seems clear that these technologies are part of a strategy that is effective in the short term. But will it always be so? We think there are a number of reasons lenders should be thinking about this now. First of all, auto decisioning involves the auto approved and auto declined applications, but those applications that fall in the gray area between these extremes must still be underwritten. Technology is improving, to be sure, but it is unlikely that it will squeeze this gap to zero in the near term. However, higher levels of competition, particularly in the A-credit home equity business, will force lenders to eek out business in other credit grades. As FICO scores drop, it is realistic to expect more loans and lines to fall out of the auto decisioning range and into the gray area where manual underwriting is required. This means that institutions, if they wish to get this business, will have to find some way to underwrite it. Lenders will have basically two options, they can outsource it or they can hire, train and maintain a staff of in-house underwriters that can handle this work for them. Contract underwriters could potentially handle this business more cheaply and perhaps faster than originators could themselves......................read full article http://www.benchmarkinternational.com/Articles/Automatic%20Underwriting%20in%20Home%20Equity.pdf