Until a few years ago, many lenders were still manually assess-ing all applications and ideas such as credit scoring and automated underwriting were relatively new.
Today, most big lenders use some form of automated underwriting and credit scoring has advanced significantly. This allows faster and more consistent decisions to be made – a development that benefits brokers, clients and lenders.
Despite increasing automation in underwriting processes, lenders recognise that applicants in certain market segments have distinct characteristics and so require a bespoke approach.
Although an increasing proportion of applications are automated, 6% of gross lending is still done manually.
In the prime market, 24% of applications have part of the process referred for manual review. In the sub-prime market a higher proportion of applications are served by manual processes.
But we have recently seen a number of lenders successfully introduce automated underwriting and they are able to provide online offers in under 30 minutes for a significant number of applications.
Generally speaking, lenders active in the sub-prime market are more likely to have a credit scoring model than those in the prime market, with 65% of sub-prime lenders using a credit score model compared with 44% of prime market players, according to the Council of Mortgage Lenders.
This reflects the fact that sub-prime business is higher risk and requires a more detailed assessment. Where appropriate, these models can be adjusted to suit different market segments.
Another underwriting method is to use the same credit scoring model but change the cut-off point.
According to the CML, just under 20% of lenders use credit reference agency information or credit scoring models and then vary the cut-off point according to the type of mortgage involved. This is typically done for sub-prime applicants, first-time buyers and young borrowers.
And more sophisticated tools are sometimes used for specific categories of applications. For example, although most lenders with affordability models use them for all applications, some only use them for applications that fall outside their normal lending policy.
The lender then looks more closely at the individual income and expenditure to assess the size of the loan.
This more bespoke approach is also reflected in the way some lenders enter new markets. Some lenders exploring fresh horizons initially decide to assess applications manually and typically use their existing credit scoring models with adjusted score cut-offs.
Of course, lenders with fully or partly automated underwriting processes are able to make quicker decisions with point-of-sale decisions now provided in under 60 seconds and referrals provided in a matter of hours.
Almost 60% of all lenders now use some form of affordability model in conjunction with their underwriting and assessment process when it comes to mortgages.
Brokers generally welcome aff-ordability assessments in underwriting as decisions are based on the financial status of the clients concerned.
Underwriting is becoming in-creasingly sophisticated and we can expect to see further enhancements in the years to come.