How Do Lenders Assess Loans?

Gone are the days when you can just go down to your local bank branch and get loan approval because of your longstanding relationship with the manager. These days lenders have become quite sophisticated in their method of assessing loans – it’s now all about Risk Assessment.

For years, lenders have been compiling data about every one of their home loans and are now using this to help set policy for new applications. Every minute detail of a loan from the occupation type, length of employment, type of employment (Full Time, Part-Time, Casual, Self Employed, etc), property type, property location, borrower credit, borrower debt, borrower savings, etc. have all been analysed and are now being used to Risk Assess each and every loan application. This is known as Risk Scoring.

Each lender sets their own scoring parameters for which each application must pass.

The first step of loan assessment is through an electronic decisioning platform in which each lenders policy guidelines are configured and assessed for Risk. The typical lender has over 65 assessments it makes on each and every loan. And remember, each lender’s policy is unique. Unfortunately, not every measurement is conveyed to us on the front-line. Our job is to know as much about each lender so that there are no unexpected surprises.

The data for the electronic decisioning is based upon the accuracy of the information that was input into the lender’s loan application.

The following electronic decisioning results will occur:

1. Conditional Approval in which the loan then needs to be reviewed manually by the lender’s staff for accuracy and any loan conditions need to be met. There is no need for further review by the lenders staff if the information sent was accurate and loan conditions, such as acceptable valuation, are met.
2. Referred. This means that the loan might still be approved but given either the complexity of the loan or it’s marginal level of meeting or not meeting policy guidelines, the loan needs to be manually assessed.
3. Declined. This decision is typically only given when the loan does not come close to meeting policy guidelines. Typically this is the result of a poor credit report profile.

For some lenders, an electronic Decline will mean instant disqualification and they will not even entertain manually reviewing the file.  For others, there is still hope for the file to be reviewed manually. Again, this is where the expertise of the Empower team can greatly benefit clients by turning declines into approvals.

Now most of us would think that the new methods of electronically assessing a loan would reduce the number of loan approvals – quite the contrary. Lender’s own research has indicated that more loans get approved electronically than manually because manually assessed loans are subject to human error and interpretation.  Additionally, statistics show that between 65-90% of loans initially given an electronic Decline but manually Approved, went into Default within 2 years! My guess is that lenders are going to start relying more on these electronic decisions in the future!