Enforcing Credit Policy? Yeah I have a spreadsheet for that…

Although very different organizations, Banks and Credit Unions share one major commonality; their examiners insist that they have strong and reliable processes for tracking exceptions to policy. Long gone are the days where the Vice President of Lending is the individual responsible for rounding up the loan officers to review the exception to policy cover sheets on the loan files. Today’s compliance requirements are much more exhaustive and have now become full time departments in their own respects.

Frequently I come across lenders who track policy exceptions in theory. They fill out a loan worksheet, and notate any policy exceptions, but are they truly enforcing policy? Moreover, how do they enforce policy while giving their loan officers the latitude and authority to make decisions that make sense, all while not inhibiting their ability to help a consumer and make a good loan?

Technology is the answer. The decision engine in your Loan Origination System (LOS) is the best solution to enforce policy. A well developed and thought out underwriting model should house the underwriting guidelines and policies. If exceptions are to be made to those polices, the decision engine should rank these policies and enforce them based on importance/impact. For example, a decision engine rule in your LOS requires that a “tier 1” applicant on an auto loan has a debt to income (DTI) ratio of less than 45%, however, the DTI on the application your loan officer just received is 48%.  All the other policy/guideline boxes have been checked off: they are a good credit risk, the collateral is strong, the advance is within reason, and overall the deal makes sense. In this scenario, the more outdated loan origination platforms would require the loan officer to get manager concurrence, most likely by forwarding the application to a superior for review and thus prolonging the customer getting a “Yes” answer.

Point of fact, outdated loan origination platforms don’t track the exception at all, instead they rely on the underwriter to manually track it! In a perfect world, what we would like to do is have a loan origination platform that notifies the loan officer upfront that this application is an exception to policy, it is a level 2 policy violation, and prior to making a decision on this application please notate a reason for the exception. Once the exception reason has been notated the system should then enforce the underwriter’s authority levels, by either allowing the underwriter to approve the loan, or require that he or she forwards the application for manager concurrence. Once the path is determined, then have the exception, application details, loan officer’s information, and the reason for the exception flow into an exception tracking report. Since you have tracked an exception to policy at origination, the platform should flag that application so that in the event it does move forward and is ultimately funded we can track it on the servicing system and monitor those loans that are exceptions.

Why can’t it be that way? Or maybe it can…to be continued…

In the next series we will explore how tracking and enforcement of policy exceptions can be the tool that helps you increase customer satisfaction by reducing response times through enhanced underwriter workflow and also safely increase automated decisioning!

 

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