By Ray Birch
BOSTON—Credit unions that haven’t updated their loan processes to include the most recent data from borrowers—including loans in forbearance, recent utility bills and even last week’s paystub—face potentially “dire” risks, according to one expert who has just completed a study of loan origination systems.
Leslie Parrish, senior analyst at Aite, told CUToday.info the pandemic has dramatically ramped up the need for remote, speedy delivery of loan products. Moreover, it also is requiring lenders to review more data points related a borrower.
“The digital transformation in consumer lending—already underway—has accelerated due to the pandemic,” said Parish, who just completed the study, Transforming Consumer Lending Through Loan Origination Systems. “Justifiably spooked by a dramatic economic downturn, lenders are facing the same high borrower expectations and intense competition from their peers as before, but now in conjunction with the rapidly deteriorating financial health of many consumers and serious obstacles to loan origination through in-person channels. Those lenders that have already transformed their lending processes by using a leading retail loan origination system are arguably better positioned to weather this storm.”
‘Flying Blind’
Parrish also suggested lenders that have not expanded the sources of information they review, including recent repayment performance, in favor of just relying largely on a FICO are “flying blind.”
“You have got to be able to incorporate multiple data points and not just rely on FICO,” said Parish. “That's critical.”
Parish said lenders that fail to digitize their lending processes will have a hard time keeping up with quickly changing conditions.
“The pandemic and resulting economic downturn may cause lenders to have to shift between the types of loans offered and the channels in which loans can be originated,” said Parish. “In addition, lenders will likely need to integrate more data and analytics into their decisioning process to truly understand the real-time creditworthiness of a loan applicant.”
Why Real-Time Matters
Parrish stressed the importance of that real-time data due to the pandemic not only quickly affecting borrowers’ employment picture but also forbearances skewing existing repayment data.
“Credit reports can’t be effectively updated due to forbearances, and in normal times traditional credit files are a lagging indicator anyway. And now lenders have less visibility into the borrower’s true picture,” said Parrish. “More real-time information is really critical. Traditional credit reports always show what a customer looks like maybe three months ago. And that typically wasn’t a problem in the past because people weren't changing much in three months. But now things are changing rapidly, and if someone's income is actually cut off or reduced that's going to show up in their account transaction data. But it’s not going to show up in a credit report until they stop making payments on their loans. It can be months later until lenders really see what's happening with the borrower.”
Parrish said that would likely mean asking for last week’s paystub for proof of employment. It could also mean asking for the latest utility bill payments and other glimpses into a person’s normal transaction data.
“A lot of lenders are pulling back to the stable borrowers now due to the pandemic and the employment situation changing for many,” Parrish said.
Leslie Parrish
The digital platforms too, allow lenders to spend less time gathering data and more time talking to a borrower to get a clear picture of them.
“These digital platforms really allow lenders to bring in a lot of data in a very short period of time, often almost instantaneously,” she said. “Not only does the data help lenders understand their customers and get a 360 view of them, it frees them up to have more in-depth conversations with them. They can have actual conversations with customers, actually understanding their needs. This is also helping lenders ask more intelligent questions and personalize the loan to the borrower.”
One Big Hurdle
Despite the need of many to shift to a fully-automated LOS system, Parrish acknowledged cost can be a significant hurdle.
“But the good thing is that many vendors offer modular solutions,” said Parrish. “So the lender doesn't completely have to transform. They don't have to completely rip and replace their existing solution. They can add the most critical piece to their system now and then build out over time. But at least they are getting that critical piece now, and offering a good online solution and experience for the borrower.”