Automated Underwriting

What Is Automated Underwriting?

Automated underwriting is a technology-driven underwriting process that provides a computer generated loan decision. The lending industry is broadly migrating to the use of new technology-driven loan underwriting platforms to improve the processing time for all types of loans.

Key Takeaways

  • Underwriting is the process of evaluating the risk involved with a financial transaction, such as a bond issue, bank loan, or insurance policy.
  • Automated underwriting uses algorithms instead of human beings to make underwriting decisions that are quicker and less prone to errors.
  • Critics, however, argue that using software to underwrite can exacerbate inequalities in the lending market.

Automated Underwriting Explained

Automated underwriting is utilized in various capacities across the lending market. It is a factor that is increasing competition and specifically competition between emerging online lenders and traditional banks. At the same time, it is also creating greater opportunities for fintech partnerships that involve revolutionizing automated underwriting and lending services.

Automated underwriting can be used in all types of loans. It is primarily used with conventional loans that include a standard underwriting procedure and basic amortization schedule for installment payments. Many automated underwriting applications are available for personal loans through online lenders like LendingClub and Prosper however large banks are also integrating automated underwriting platforms as well. In general, lenders can offer automated loan applications for credit cards, personal loans, auto loans, and mortgages.

Automated Underwriting Applications

Automated underwriting has historically been relied on for credit card underwriting however it is becoming more popular with conventional loans. Loan applications can be structured to take basic application information including addresses, social security numbers, and income details. Partnering with information vendors, automated underwriting platforms then use basic loan application information to retrieve relevant data, such as a borrower's credit history. From there the automated platform can process a borrower’s information through a programmed underwriting process that instantly arrives at a loan decision.

Automated underwriting makes the first phase of the underwriting process much more efficient. It has the capability to provide instant outputs that can generally take up to 60 days to complete with manual processing. It also has the capability to flag and refer applications to manual underwriting, for certain verifications in the final phases of the lending process. With conventional loans, human interaction is typically required to verify some inputs such as income and assets in order to close the deal.

Loan Operating Systems

Loan operating systems in the lending market are also rapidly evolving to service all aspects of the loan process. In addition to automated underwriting, loan operating systems can be built to generate amortization and installment payment schedules, provide an automated portal for online payments and provide servicing notifications to the lender on payment delinquencies.

Numerous loan operating system platforms exist from a variety of financial technology providers. Freddie Mac maintains and markets a large automated underwriting engine known as Loan Prospector and Fannie Mae has an automated underwriting engine known as Desktop Underwriter. In general, loan operating systems can be built through a variety of application programming interfaces that allow for plug-ins from numerous technologies in order to create a customized system.

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