There’s no question that a good automated underwriting (AU) system has the potential to provide small and mid-tier lenders the muscle they need to compete - even against the big-name competition. Today’s AU systems offer lenders the clout of multiple investor products customized under their own private-label brand.

But as you start to shop around for an automated system, you may find yourself challenged to sort through the numerous products and features - all the bells and whistles - available out there. With that in mind, here are a few of the features found in automated underwriting engines on the market today that offer unique advantages.

Pricing versus underwriting

One of the first things you need to understand as you venture into the world of automation is the difference between pricing engines (basically pre-qual systems) and more robust AU systems. Pricing engines are merely rate sheets displayed in an electronic format. They do not have any kind of decisioning capability. Whether a borrower qualifies for a loan program is not a consideration. And thus, ultimately the pricing becomes irrelevant since loan-level price adjustments are heavily dependent on determining a borrower’s qualifications. To gain a competitive edge in today’s lending marketplace, be sure you’re looking at AU systems that can handle both pricing and underwriting.

Since underwriting guidelines and pricing are interdependent, it then becomes paramount that your system is able to evaluate each borrower with as much specificity and accuracy as possible. The only way a system can reach this level is by reading a borrower’s credit report in detail, directly from the source. A good AU system is set up to interface with credit providers, parsing out raw credit data into identifiable units. The farther away you move from reading live credit data, the less reliable any system becomes in rendering a useful decision.

In addition, it’s an obvious disadvantage to your originator and any potential borrower if they have to pay for a new credit report to process a loan. With an automated underwriting system that is integrated with a significant number – as many as 200 - credit reporting agencies, there’s no need to purchase additional credit reports and put any more “dings” in a borrower’s score.

Web-based, SaaS or both?

It’s important to understand what is meant by “web-based” and “Software as a Service” (SaaS) when you’re exploring your system options. Web-based refers to a type of software where the Internet and a web browser are used as a means of delivering system functionality. One of the main advantages of using a web-based system is that the total cost of ownership (TCO) for the software is much lower, because it’s distributed to users via their web browsers. In some cases, this can result in an overall savings of 70% or more.

A web-based system is not necessary, but it certainly offers a more efficient way to deal with software logistics (and costs). Besides, who wouldn’t want to use an AU system that can be accessed through any Internet browser rather than be limited to software that’s installed on a specific computer?

In addition, by using web-based technology, you’re able to avoid the months required to build and install a system on your own server. State-of- the-art web-based systems can be deployed in just a week or two, because the system already exists on the AU vendor’s server.

SaaS is a business model type that can accompany web-based software. SaaS adds a service component that enhances usability and value over time. In an ideal context, SaaS transforms the static “software” concept into a dynamic environment, where system functionality responds to client demands by continually updating itself and delivering these updates instantaneously.

Underwriting and pricing is complex, and changes are a constant. And these modifications and updates can have drastic effects on accuracy and effectiveness. Current market conditions are a perfect example: Investors, particularly in the subprime arena, are responding to early payment defaults (EPD), fraud and other painful symptoms of market weakness by changing their underwriting guidelines. These changes need to be distributed to all loan buyers and sellers quickly and efficiently.

A web-based system, while able to deliver changes instantaneously, still needs someone to make those updates and modifications. If the AU provider offers a web-based system, but does not follow an SaaS model, then the client is responsible for making the guideline changes him/herself. This requires finding and hiring personnel, providing training, and devoting resources to implementation (including testing) and system maintenance.

An SaaS model, however, allows the lender to rely on the automated underwriting vendor to perform all of these activities on his/her behalf. Since the AU provider and its staff are extremely knowledgeable about the system - they built it, after all – an SaaS system results in faster and more accurate updates to the AU engine. Given today’s challenging lending environment, a web-based AU system coupled with SaaS could mean the difference between profitability and some serious problems due to system maintenance errors.

Investor relationships

It is also important to examine the communication channels that will be set up between you, your AU provider and the investors who are providing your loan products on an ongoing basis. Typically, lenders view their AU system as an exclusive relationship between the AU provider and themselves. However, your loan investors have an important stake in the relationship as well. From their standpoint, it is in their interest that their rates and guidelines are implemented by the AU vendor accurately. Although this kind of information can be supplied to the AU vendor via your company, it is clearly preferable for the lender that the information comes directly from the investor.

There are numerous rules, rates, metrics and guidelines surrounding each loan product. Ask yourself if this is something you’re prepared to maintain and provide to the AU vendor. Or would you prefer that your AU provider access this information directly from each investor?

In addition, there must be regular testing and vetting of investor rate and guideline information to ensure that it is being interpreted correctly. Trial-and-error testing performed by the AU vendor will eventually root out inconsistencies, but the QA process takes time. Partnering directly with investors to perform independent testing of their products speeds up the QA process and provides more accurate and reliable results.

Testing, 1,2,3

Ultimately, the litmus test for any AU system is how well it performs under real-world conditions. Any salesperson can tell you what you want to hear and show you exactly what you want to see. However, only by running live loan scenarios and comparing the results with your own rate sheets will you be able to determine the effectiveness of the technology.

Ask for the opportunity to test a production version of any system you are considering - independent of the sales pitch. Once you have arranged for a live demonstration, have your account execs, your brokers and your underwriters put the system through its paces.

A is for “Accuracy”

One of the key questions to ask yourself as you sort through various AU system features is, “How does this affect the accuracy of the system?” At the end of the day, that’s the critical bottom line. Who cares how fast the system is if you can’t rely on it to produce accurate results? Who cares if it provides paperless documents if they need to be triple checked for errors? Who cares that you can process applications 24/7 if you’re too worried to sleep through the night?

The goal of all AU systems is to provide originators with eligibility and pricing results that accurately reflect investor guidelines and pricing. An inaccurate AU system not only produces errors that cost lenders time and money, but it can also damage their reputations and render their AU systems irrelevant because no one is willing to trust it.