The clock is ticking
Neil Williams (pictured) is managing director of LendingMetrics, the UK company behind OpenBankVision and ADP automated decisioning platform.
Time is running out for ‘guarantor’ lenders whose reluctance to update their underwriting departments could land them in regulatory hot water.
Guarantor loans have rocketed in popularity in the UK over the past few years.
They have proved very attractive to those with poor credit histories who find that using a more reliable ‘guarantor’ to underwrite their repayments is a much easier way to obtain finance.
Balances on such loans have more than doubled since 2016 in the UK and are fast approaching the £1bn mark.
Such meteoric growth has begun to ring alarm bells at the Financial Conduct Authority (FCA), which announced last month that it was concerned about how guarantors were being treated by lenders.
It has growing anecdotal evidence that guarantors do not understand what they are letting themselves in for, nor how likely they are to be called upon to make good a missed payment. More worrying still, they say an increasing number of guarantors are making at least one payment, and the percentage of guarantors making these payments is itself on the rise.
Jonathan Davidson, executive director of supervision (retail and authorisations) at the FCA, told lenders at The Credit Summit that the regulator was determined to ensure that guarantors were treated fairly by lenders. Specifically, he said, it wanted to target ‘affordability’ and whether guarantors understood the implications of a guarantee being enforced.
Already, he told the event, the FCA had amended rules to stipulate that lenders must “undertake a reasonable assessment of the potential for the guarantor’s commitment to have a significant adverse impact on their financial situation”.
And he put the sector on warning: “A tick-box cultural approach to compliance will be expensive and will likely not be enough to ensure that customers receive the right outcomes.”
Tick box exercise is, however, I’m afraid to say, what best describes the affordability assessments that are currently undertaken by some lenders in this space.
If truth be told, the assessments used are often stuck in a time warp with lenders still relying on the say-so of potential guarantors, basic paper proofs and other manual processes. These are all at best approximations for affordability and at worst fraudulent representations of the guarantor’s true status.
In the age of Big Data, when terabytes are being accumulated on a daily basis and available at the press of a button, there are literally thousands of underwriters who produce what are little more than guarantor affordability ‘guesstimates’.
Why is this still happening? The short answer is that many lenders are wedded to the manual systems that they have been using for as long as they can remember and cannot quite wrap their heads around moving to new auto-decisioning underwriting technology.
The knowhow, utilising Open Banking, has been around for a while (LendingMetrics has been providing it to early adopters for at least five years), but inertia is always a difficult thing to overcome. And why try to fix something when it is not obviously broken.
Well, such delay cannot continue for much longer given that the regulator is set on cracking down on poor customer assessment. Proving to the FCA that you are making effective affordability judgements when you have little more than a tick box system in place, is not going to be possible for much longer.
Not when Open Banking platforms can make extremely accurate affordability and creditworthiness assessments in seconds for you. No more reliance on say-so’s, credit history or paper proofs.
As we all know by now, Open Banking requires banks to share their line-by-line detailed customer statement data with other parties. This treasure trove – which has always been jealously guarded by the major banks – is now available to all lenders (with the agreement of the finance applicant) via Account Information Service Providers (AISP).
So, with an applicant’s permission, months of transactions can be probed. Read-only data comes directly from the bank that holds the current account to the AISP, so not scope for fraud.
And it is supplied in real time. Someone applies to be a guarantor, agrees to limited timeframe and read-only access to their accounts, and thousands of lines of transactions can be analysed. In milliseconds, this can pull out salary details and all financial commitments, to be then tested by algorithm to determine whether the loan should be granted or not, and whether the individual is a suitable guarantor.
Lenders – for the first time – can make an affordability assessment that is extremely accurate.
In the past, the problem has often been that the individual has had a rose-tinted view of their finances. Not any more. With real-time data to examine, this is not an issue. The data and subsequent analysis provide insights that often the applicant will be ignorant of.
The technology can pick up on things that would otherwise be overlooked: patterns that if continued would lead to budgeting problems, such as that which indicates a gambling habit.
And all this is done digitally and, as mentioned, in milliseconds. No more paper applications, no more laborious supplying of paper ‘proofs’, no manual underwriting of loans, no more two-week wait for a decision.
The automated technology can place the lender’s own rules around the raw intelligence. There is either a ‘decline’ or ‘referral’ outcome for the guarantor (and the borrower). And, with referrals, instead of the underwriter having to go through a long list of standard ‘tasks’, only those tasks relevant to the applicant are flagged.
Such assessments even allow the application of risk-based-pricing, giving much wider flexibility to the lender’s product offering and options to the consumer.
Mistakes are eliminated.
Most lenders will admit that, while they might have a team of say 10 underwriters, seven may be following the lead of three highly experienced long-standing employees who know the scorecard inside out. This creates a big potential for oversight or mistakes. Auto-decisioning means an end to this. Indications of fraud are better detected and quickly picked up by the technology.
Loan management is made much easier. A borrower’s bank transactions are usually obtainable within a 90-day timeframe, so, if a first payment is missed, the account can be ongoingly interrogated so a request payment call can be timed when there is sufficient funds in an account. This avoids the need for going to the guarantor in the first place.
Collection rates can be improved by only phoning late payers who have sufficient money in their account.
Signs of stress can be straightforwardly picked up, way before the guarantor is called upon. A monthly check can trigger conversations with those borrowers struggling with managing their finances. Payments can then be reorganised rather than missed.
With this sort of regime, every lending decision is light years away from what it has been. And the decisioning is embedded into the online application process.
Apart from delivering massively better decisions, the automation brings big cost savings. Underwriting that used to require a team of people, no longer does.
Alongside the potential salary cost savings, the automated decisioning removes the need to pay for credit searches, AML, KYC or income checks. Given that each credit search alone can cost one pound fifty, the total savings made are considerable – even for a small lender.
Ah, I hear you say, what about the question of implementation timescale and IT expertise availability.
Well, neither of these need apply. There are platforms – such as LendingMetrics’ OpenBankVision – that are available off-the-shelf. They can be ‘white labelled’ and made to work within hours. We can have OBV working on the day a contract is signed.
Such platforms have the benefit of being tried and tested. They are already in use by ‘early-adopter’ lenders. No extended implementation timeframe, no IT expertise vulnerability. They will work from day one.
The platform could even be free (OBV is). I am often asked for ‘proof of concept’ or a trial, because lenders are concerned about the costs of auto decisioning. I have to repeat to them – because they find it hard to believe – that our platform can be used free, with no minimum usage or ongoing charges. (We derive our profit from selling parallel services.)
With us, there is no commitment and no cost.
The lenders that are using this sort of knowhow have been able, in an instant, to dramatically improve their affordability checks for guarantors (and borrowers), while at the same time rationalise their underwriting resource and take the brakes off any growth that might have been choked-off by manual processes.
So, for those lenders who, after reading this article, remain unconvinced and would still rather stick with their existing ‘tick boxes’, I have one question. Can you really remain as you are for much longer and continue to comply with your regulatory requirements?