By Shelly Nischbach
Today’s economy is rife with uncertainty, and each day brings something new – whether it’s inflation, talent shortages, interest rates or fluctuating market conditions. Such factors can make it difficult for financial institutions to keep up – while also continually working to realize efficiencies and improve processes – particularly when it comes to lending.
While there are several options for financial institutions to obtain the funds needed to originate consumer loans, securitization is a proven strategy to replenish consumer loan funding and a valuable tool for financial institutions looking to diversify their funding sources. When loans are securitized by packaging up a set of consumer credit, such as auto loans, credit cards or personal loans, and selling it to investors – who will then receive future cash flows – they are referred to as asset-backed securities (ABS).
When it comes to securitizing loans in this manner, lenders can improve the attractiveness of their loan portfolio to ABS investors by leveraging automated income and employment data for decisioning at the individual loan level. Financial institutions know all too well that how a loan is underwritten is a key component in rating agencies’ evaluation of a lender’s portfolio. Recent research from Aite-Novarica reveals how automated income and employment verification solutions can give lenders a competitive edge.
In today’s uncertain market, verifications of income and employment have become increasingly common as lenders seek more data insights into a borrower’s ability to pay. While this may be routine for mortgage lenders, lenders offering other consumer credit products are also starting to see the benefits – better managing credit risk by enabling a more holistic view at the individual loan level.
There are various ways to verify income and employment. These methods might include traditional and alternative sources like bank transaction data, consumer-permissioned data, and consumer provided documents (paystubs, W-2s). Though increasingly, lenders that want to consider income and employment information in their underwriting are turning to more automated approaches that enable robust real-time data that can be requested, as needed, with updates each pay period.
Automated solutions not only help with credit risk management for loan application decisioning but also enable a better candidate experience by helping speed up time-to-decision. Unbiased, third-party automated verifications can also help lenders apply a more consistent decisioning model for each applicant when data is available. Compared to manual approaches to income and employment verification, automated solutions help to streamline processes and reduce inefficiencies and friction throughout the loan decisioning process by delivering current, near-instant results.
While income and employment verifications can benefit all lenders, lenders that securitize loan portfolios may experience additional benefits by making their offerings more attractive to rating agencies or investors. Verification of income and employment, along with other steps in the underwriting process, can result in a higher rating of a lender’s consumer ABS program – especially if the lender can demonstrate that its decisioning criteria has routinely yielded strong results. Lenders who verify income and employment at the loan level may be viewed more favorably as part of rating agencies’ assessments.
In short, automated income and employment verification can give financial institutions a competitive edge when looking to improve portfolio attractiveness for investors – but can also yield benefits for lenders and consumers alike. It is important for lenders and ABS investors to understand the dynamic relationship between a borrower’s income and employment status, and their likelihood to repay a loan. By leveraging automated income and employment verifications to enable a more holistic candidate view, financial institutions can make more confident lending decisions that may also in turn make their ABS portfolios more attractive to investors.