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Credit Adjudication Using New Digital Data Sources

Date: May 23, 2016 @ 07:00 AM
Filed Under: Risk Management

Lessors and lenders are feeling the pressure from many angles -- there has been increased competition and rates continue to be at record low levels. This “margin squeeze” is forcing lenders to be more creative in how they win business. There is also a wave of FinTech, alternative and marketplace lenders looking to grab market share. In order to compete with these pressures, lenders and lessors are looking to become more efficient and shorten their time to funding.

To be sure, the most time consuming task at hand is getting accurate data from your borrowers. The faster you can streamline this process, the faster you can turn around an approval and get that deal off the street. This could include getting bank statements, verifying tax returns or pulling consumer and business credit bureau reports.

Throughout this article, I will refer to the term API or Application Programmable Interface. In simple terms, this is how different software systems can talk to each other using a common language. It enables seamless data transfer between systems.

"Source" Data

Both technology and behavior changes are enabling a new wave of data services available to lenders. These technologies allow your current lease/loan management system to integrate directly and retrieve information such as financial statements, bank statements and pay stubs directly from the source. These sources can range from a QuickBooks database to the federal government.

Borrower’s expectations are also shifting -- they expect speed and convenience. Borrowers no longer need to scan, email, or fax their bank statements to lenders. This information can be gathered online during the credit application process. Yodlee, Intuit, DecisionLogic, and Plaid are meeting this demand by offering APIs for retrieving bank statements and more. These services allow your borrower to enter their financial institution’s credentials and for lenders to retrieve balance and detailed transaction information. This gives lenders direct insight to the borrower’s cash flows.

  • Yodlee is the incumbent in the bank statement area. They cover the majority of banks and may provide the biggest amount of coverage. The challenges might be cost and integrating this solution with your existing credit adjudication systems.
  • DecisionLogic can be used to verify a borrower or guarantor’s identity as well as provide access to past bank statements.
  • Intuit offers APIs to retrieve statement information as well as import financial statement information right from QuickBooks.
  • Plaid is the up and comer out of San Francisco.

We had a conversation with Sima Gandhi, Head of Business Development & Strategy, from Plaid. She said, "Having raw unstructured data is sometimes challenging to work with. Plaid does not make credit decisions, but we do provide actionable transaction data that is categorized and can be used in scorecards or decision algorithms." We asked Gandhi more about their new "Income" and "Risk" products. "These are analytical products that use the bank transactional data to help identify patterns. For example, the Risk product can be used to reduce fraud by identifying factors such as an abnormal number of international transfers. On the income side, it can be used to validate employment or even time spent in business." No more paystubs, no more bank statements.

This sort of automation is not limited to automating financial statements. There are a number of providers that offer services for importing tax transcripts directly into your system via an API or have access via a cloud-based solution. The ones that we have come across are Veri-tax and PointServ. Both these services use 4506-T, however PointServ also has integration with Intuit and payroll providers for immediate results.

PointServ has become an increasingly important player in the mortgage space because they return source data for all the income and asset verifications needed to satisfy Freddie Mac and Fannie Mae’s acceptance requirements. PointServ’s technology gives lenders access to source data for borrowers tax, W2s, paystubs and financial accounts. They offer consumer and corporate information too. This is important on the front side of adjudicating a borrower.

Steven Comfort, PointServ’s Executive Vice President stated, "If a buyer of a pool of loans is able to choose between pools with source data and pools without it, there will be a bifurcation in the secondary market. The source data pool will trade at a premium because it is de-risked; meaning source data removes the possibility for fraud at the borrower, broker and loan officer stages of origination. Over time, the borrower should be provided more attractive financing because of the ease of selling their loan and the cost savings realized by the lender when a borrower provides source data instead of faxes, uploads and email attachments."

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