Magazine article American Banker

Ponder the Costs before Centralizing Your Underwriting of Small-Biz Loans

Magazine article American Banker

Ponder the Costs before Centralizing Your Underwriting of Small-Biz Loans

Article excerpt

Thanks to the recent introduction of new small-business credit scoring models from Fair, Isaac & Co., banks can now make more credit decisions primarily on the basis of the customer's credit score than ever before.

The potential for improving efficiency by using these models makes it very tempting for banks to reduce or eliminate credit decision making authority in the field, and to centralize the processing and underwriting of small-business loans.

But the issue that should be considered is whether the potential for lower underwriting cost can actually be realized from the bank's loan policies and loan officer capabilities. More importantly, will central underwriting actually lead to more profitability and customer satisfaction?

Banks that use credit scoring for small-business underwriting believe they cannot totally divorce themselves from judgmental underwriting policies to protect credit quality. While bankers argue that credit scoring helps them with the credit question by accurately predicting the rate of default, it does not address other credit issues: capacity and character. As a result, the credit score is typically coupled with measures of income and cash flow, as evidenced by financial statements and tax returns.

If centralized, the underwriting unit that needs this capacity proof must cut into the efficiency of the process by somehow getting these documents transported from the field to the underwriting center.

In addition, central underwriters are insulated from getting to know the customer. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.