Technology Trends in Lending

Steve Williams, thePoint
December 28, 2004

Credit unions everywhere are busily working to improve the speed, efficiency, and simplicity of their lending operations. With unlimited competition for members' borrowing relationship, credit unions realize that traditional approaches to lending won't cut it in the years ahead. Instead, credit unions are looking to automation and new technologies to reinvent how a member gets a loan.

There are several key technologies that will drive the future world of lending for credit unions:

Web services

-Credit scoring -Electronic, business-to-business information exchange -Work flow and document management -E-signatures

Let's examine these technologies and then review the current vendor market for loan origination systems.

Web Services

The entire world of business technology is migrating from today's "client/server" technology to a new architecture known as Web services. In the old world of client/server, software generally resided on a lender's desktop and accessed centralized data through this "fat" client. ("Fat" means software was actually on the employee's PC.) Under Web services architecture, the employee simply uses a Web browser or "thin client" to access centralized data and programs. By accessing the "Web services" centrally, the credit union can have greater control over its IT environment. Software does not have to be installed and updated on every employee desktop.

In addition to the move from "fat" to "thin," the Web services architecture also brings new power for systems to "talk" to each other. Software developed today typically uses a standard called extensible markup language, or "XML," to categorize and describe data. This makes it easier for vendors to interface from one application to another. In theory, an entire series of different Web services applications from different vendors could work together in a coordinated fashion. However, we'll have to see how well the technologists and vendors actually work together to make such coordination become real.

Automated Credit Scoring

Credit unions are clearly finding greater efficiencies in loan underwriting through the use of automated credit scoring. In the years ahead, executives can expect credit scoring to become even more sophisticated and targeted.

A key trend today is that many credit unions are moving from simply pulling a credit bureau "FICO" score to applying more powerful off-the-shelf or customized scorecards. The "ARM" score from Fair Isaac is gaining credibility as a more precise measure for loan decision-making. In addition, some credit unions are building their own scorecards after pooling enough internal data and history to make the resultant scores statistically significant. As credit unions broaden target markets and attract greater diversity in their member bases, credit scoring will be a useful tool in ensuring that credit standards and effective risk-based pricing are applied.

Business-to-Business

More and more, financial institutions are extending the automation of loan processes to involve third parties. This is known as business-to-business, or "B2B," the electronic exchange of information from one entity to another.

Here's a simple example of how B2B is revolutionizing lending. Traditionally, lenders have trudged through the home equity lending process with a series of manual activities to order the borrower's credit, as well as title and appraisals on the borrower's home. Today, all these steps can occur instantaneously and electronically, as the loan application is fed directly to various outside parties to complete the order. B2B is vital for credit unions to speed up loan closing time and to efficiently process loans.

Work Flow and Forms Management

One of the hottest areas of development today is automated workflow capabilities. New tools and software have emerged that allow credit unions to customize lending processes around an organization's unique needs.

Automated work flow has many practical applications in lending. For instance, a certain type of loan application may automatically be routed to the underwriter best equipped to analyze that type of deal. The recipient of an appraisal may automatically e-mail the branch and the member to notify them. Certain borrower information may "trigger" the need for a higher approval authority or specialized compliance reporting.

Automated work flow is exciting because it helps credit unions manage the complexities of lending via software vs. having to develop this knowledge in the heads of all employees.

E-Signatures

One of the sexier yet slower moving technologies in the lending process is that of e-signatures. Although e-signatures have been legal and piloted for several years, no mainstream process has emerged across the industry to make this a popular way of closing loans. Today, many credit unions have succeeded in electronically capturing physical signatures at loan closing using signature pads. However, to ever facilitate true remote loan closings, true e-signatures will be needed.

In the next few years, credit unions will witness significant changes and improvements to loan technology. Executives should have a plan and a disciplined project approach to leverage the world of lending. Steve Williams is a principal with Cornerstone Advisors (www.crnrstone.com) in Scottsdale, Arizona. This article first appeared in The Point for Credit Union Research and Advice at http://thepoint.cuna.org and is reprinted with permission.