Credit Decision Engine - Personal Installment Loans

Whether you are a bank, credit union or a state licensed lender, heck, even a Buy Now Pay Later BNPL player, a credit decision is fundamental to your business. Most often, offerings from banks to Buy Now Pay Later players are in essence a personal installment loan.

Personal installment loans are a fixed term/length/duration form of credit often associated with an interest that an individual takes out to pay for school, a car, a home or personal events such as a wedding or home improvement.

Personal installment loans are fundamental to our way of life. In the United States, the total volume of personal loans is approaching $400 million. Just about every working adult in America has some form of personal loan. This exclusives credit card balances which we will address in another series.

Credit Decision Engine - Underwriting for a personal installment loan

When an individual applies for a loan at a bank, the individual often already has a relationship with the bank. For example, if an individual has a personal check account or a DDA (Demand Deposit Account), that person is likely to goto a bank for a personal loan to pay for a medical procedure.

A banker traditionally may know this person that comes into his or her branch from time to time and can make a fairly sound decision to grant this person a loan. The banker or loan officer will look at the longevity of the relationship this person has had with the bank. And from this person’s banking activity, the loan officer may be able to make a guess as to the person’s employment situation and his or her assets and liabilities. Most of the time, this interaction is done at a bank branch or over the phone where some level of authentication is done and an experiential (gut check) decision is made to give this client a loan. 

If the person has no relationship with the bank, the likelihood of this person getting a loan from the bank is near zero. This is how traditional banking works, it’s a relationship between the banker and their client. 

Credit Decision Engine - Underwriting for a personal installment loan in the era of FinTech

Traditional banking is alive and well and even the most technologically savvy consumers visit their local branch such as Chase, Wells Fargo, Bank of America and Citi, if you live in the United States.

However, neo-banks or these branchless banks such as Chime and Varo Money are showing up in the past 10 years to take advantage of the mobile phones and younger generation of the borrowers. So how do these new fintech and mobile banks function when they have zero relationship with their customers? Well, through a series of data intake from a variety of third party data providers. Let’s take a look at the stack of third party data providers they need to make a simple yes or no decision to start the relationship with their customers through a pure faceless transaction.

Credit Decision Engine - Identity verification for a personal loan

One of the fundamental ways of verification of a personal identity is to first verify their pseudo personal information such as their mobile number and email address. Both of which can be easily spoofed and unreliable. 

The second layer of defense is probably some form of geolocation and device identification. Sophisticated hackers have already figured out how to trick online finance institutions. The last line of defense data from the biggest credit bureaus.

Some of the more sophisticated banks and lenders will also have real time internal reports to make sure to detect activities relating to Anti-Money Laundering of AML. Sometimes these internal reports inadvertently help to catch identity fraud. Well, if someone or criminal organizations are trying to launder money, they are probably going to use fake identities. 

The bottom line here is that a credit decision engine should have standard third party identity bureaus connected and all of the scores and attributes from these third party data providers should be made available to the fraud analysts and risk management professional to write rules.

Credit Decision Engine - Credit underwriting for a personal loan

After identity has been verified by the credit decision engine, it is time to move on to the next stage of the underwriting process. In this step, the decision engine should be able to connect to all of the standard credit bureaus. By now, we come to expect that all of the content, attributes and scores should automatically be made available through the decision engine for risk managers to write rules.

Sometimes, these credit underwriting rules are simple, such as Decline if Credit Score is less than a certain number. But oftentimes, these credit underwriting rules can be complex and involve multitudes and multiple layers of rules. We’ve seen some really complex rules being implemented in our Decision Engine by our clients.

In a future installment of our Credit Underwriting series, we will talk about another section of the entire credit underwriting process which is Product Assignment Rules.

Credit Decision Engine - Product pricing and loan amount assignment for a personal loan

Most of the so-called turnkey decision engines stop when the underwriting rules are executed and fail to continue the underwriting process by providing a way for banks and fintechs to set personal installment parameters such as loan amount, tenure or duration of the loan in addition to fees, interest rates, Annual percentage rate. A decent credit underwriting engine should have this portion of the module installed. Otherwise, the user of the decision engine will again need to finish the underwriting job with external engineering help. This, again will cause errors and delays of product launch and making critical changes to the underwriting decision changes.

Try a our free credit decision engine at LendAPI.com

Decision engine is a critical part of our platform and we are making it free to use for banks and financial institutions. It’s a free and easy sign up and you can program any types of rules you’d like free of charge for 30 days. If there are third party data providers you would like us to integrate, we will do it free of charge and make those scores and variables available for you to use.

We are standing by to help you to get onboarded. Register today at www.lendapi.com or email us at info@lendapi.com