Say “Yes” to the Consumer
To lend, or not to lend?
Lending: the delicate art of saying “yes” as much as possible… but not too much. Lenders of all sizes make it their business to maximize their return on investment. The foremost way to do so is to maximize the amount they lend. If 2008 taught lenders anything, however, it’s that too many risky investments work against that goal. So there’s a balance to achieve, weighing the benefits of minimizing decline traffic (i.e. the benefits of saying “yes” more often) and the potential risks of lending to underqualified borrowers.
Further complicating matters, FCRA compliance mandates that creditors give specific, concise reasons for turning down applicants. All this points to one solution: lenders should gather as much information as possible on prospective borrowers, to inform their ultimate credit decision.
The Information Game
Data-driven decision making is the zeitgeist of the financial industry, and that’s unlikely to change any time soon. Simple math suggests that for lenders to maximize their profits, they need to lend to every creditworthy applicant while avoiding all unqualified borrowers. That depends on collecting as much relevant, reliable information about prospective borrowers as possible.
To take one financial firm as an example, Wells Fargo boils its key decision-making data points for business loans down to five “Cs”: character, credit, cash flow, capacity, and collateral. The applicant’s personal history of responsibly managing debts, their current and likely future financial capacity, and their current assets all inform the bank’s lending decision. The more data points that can work in a potential borrower’s favor, the more justification a lender has for extending credit to them.
Lending to the Unscored
Applicants without sufficient credit history to generate a credit score, on the other hand, are referred to as “no-hit” or “no-score” applicants. The Consumer Financial Protection Bureau estimates that as many as 45 million Americans fall into this category. For lenders, this information gap is a problem: by lending to the unscored, creditors are gambling with their money. Moreover, the absence of a credit history can make it difficult to turn down an applicant and remain FCRA-compliant, since adverse action reporting regulations require creditors to list specific data points which informed their choice not to extend credit. What’s to be done when there are, in fact, no data points to reference?
To combat this problem, lenders are increasingly turning to alternative forms of data – such as applicants’ utility data – to inform their credit decisions, maintain FCRA compliance, and reduce decline traffic. By considering an applicant’s history of utility payments, creditors get a look into the applicant’s history of financial decision-making they can use to make transparent, informed credit decisions. A great utility payment history can justify extending a line of credit where a creditor otherwise might not have, and poor utility payment history provides third party verified data to back up a denial.
Are you utilizing alternative data in your lending process? Tell us about it on Twitter! And if you’re ready to find out how Urjanet can help your firm access utility data to say yes to more customers, contact us today.
- Expert Q&A with eCredable: Changing the Credit Scoring Game with Alternative Data
- Report: Breaking Through to Generations with Better Data
- From KYC to KYB: A Brief History
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About Nick Arehart
Nick Arehart is a marketing intern at Urjanet who specializes in financial services and sustainability. He's passionate about content that informs and inspires. When he isn't writing for us, he's finishing up his chemistry degree at Emory University.