View more on these topics

Scoring a loan goal

With technological developments, the way in which intermediaries transact mortgage business may be very different in the future.

Technology is proving to be a real catalyst for change, especially in the non-conforming mortgage sector. This sector grew by around 19 per cent last year and will continue to grow due to a wide range of factors. Perhaps the biggest factor has been technology or, more specifically, the growing use of credit-scoring systems.

A lender&#39s aim is usually to maximise volume at minimum cost with minimum risk. To reach such an objective, many lenders have developed cost-effective credit-scoring systems to assess the applicant against a number of fixed measures to determine the future risk of customers in terms of repayment and default.

With credit-scoring systems, the lender relies on information gathered by credit-referencing agencies, in combin ation with data it gathered during the application process, who collect data on individuals such as previous add resses, records of CCJs, details of other credit agreements and records of any previous sear ches. It also collects:

Information on payments from their credit account inf ormation-sharing scheme, called CAIS by Experian and Insight by Equifax;

The implications of postcode on risk assessment which depends on comparing the electoral role with census information, called Mosaic by Experian and Fruits by Equifax.

Information from their Detect scheme aimed at fraud prevention, where inconsistencies between past and present applications are monitored.

While the agencies gather the information, it is the lenders themselves who combine this with their own details to develop credit scores or risk ratings for borrowers. Each system is unique to the lender, but all yield similar results, avoiding the same types of risk and making the lending decision swift and economical.

It is through such systems that the automation of the lending decision process has developed, creating a market of potential borrowers who are rejected because they are deemed to represent a higher risk. Yet in truth, many of these borrowers will represent good credit risks.

As a consequence, we have seen the emergence of many specialist (non-conforming) lenders which are able to lend to borrowers deemed too high a risk by others. They can do this by examining each application on its own merits and assessing the borrower&#39s ability and intent to pay.

With more and more borrowers failing the credit-scoring systems, the non-conforming market has grown. But why would someone fail the credit-scoring?

There are many reasons. The two most common reasons are a record of county court judgments within the last six years and being self-employed.

In addition, those who move home frequently bec ause of their work may be excluded through lacking a long-term home address, as can those working on short-term contracts because of their lack of job security.

Aga inst these sorts of risks presented by people who do not fit into the “ideal” credit-scoring pattern, there are those who have impaired credit histories, such as mortgage arr ears or CCJs, and those with no credit history, perhaps not having a credit card.

As technology becomes more sophisticated, creditreferencing agencies will be able to capture more information on borrowers, as in the US. As more information is held, we will see even more borrowers fail credit-scoring systems and be refused a mortgage.

Fortunately, specialist lend ers can look beyond the statistics and take a more threedimensional examination of the borrower.

For example, they will look at the reasons behind a CCJ and if the reason was more a blip than a trend, perhaps due to a divorce, redundancy or long-term illness, then the borrower may be a good risk.

Non-conforming lenders are filling a gap left open by traditional lenders which prefer a more automated approach to risk assessment. As technology improves, credit-scoring systems will become more efficient and so this gap will widen.

Recommended

No credit to Chancellor&#39s pension proposals

Industry commentators are usually loathe to knock Gov ernment policies which app ear to help the most vul nerable people in society but many have broken ranks to highlight the shortcomings of the Chancellor&#39s pre-Budget pension proposals.Close examination of the report has led IFAs and pension experts to reveal a different story from the feelgood […]

X marks the spot

In the two months since laun ching our X-share class, Hen-d erson Global Investors has undertaken an extensive timetable of IFA roadshows across the country, designed to explain more about the share class that we believe will eventually become the standard fare of UK fund management houses.For anyone who missed the initial post-launch press coverage, […]

MICK McATEER

Being catapulted to sup er star status among the IFA industry does not sit comfortably on the shoulders of a quiet man from Northern Ireland. But Con sumer&#39s Asso ciation sen ior policy adviser Mick McAteer has become the cham pion of IFAs united against FSA and Treasury proposals to axe polarisation.McAteer says: “We cannot […]

Fidelity and CCS funds upgraded

Two Fid elity funds have been upgraded to AAA status following Standard & Poor&#39s review of the managed funds sector.Fidelity&#39s MoneyBuilder global and WealthBuilder funds were both upgraded from AA status.Capel Cure Sharp&#39s Hallmark growth portfolio fund was also upgraded to AAA status in the managed balanced sector.The upgrades follow a mixed year for managed […]

Guide

Guide: 10 required letters — what to send, to whom and when?

This guide from Johnson Fleming will take you through the required communication and also give ideas for additional actions that will ensure your auto-enrolment project is a success. The topics in this guide include: the letters you need to send out; what to send and when; the importance of employee engagement; and what to consider as additional communication.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment