Broker Guide: Lending policies and scorecards

Broker Guide: Lending policies and scorecards



Bridging & Commercial wanted to ascertain what the difference between lenders’ lending policy and scorecards actually are, and whether scorecards are still used in lenders’ application processes today.



Lending policies outline what type of lending the organisation will accept and takes into consideration things such as, LTVs, income types, geographical rules, property type, residency and the age of a borrower.



A lender’s scorecard will look at the borrower’s individual financial situation and assess the likelihood of that borrower being able to repay their debts. They may have a look at the borrower’s credit file and if it shows that the borrower has got a history of not paying on time, or has more debt that they can service, it will give the case a low score and vice versa for a borrower that always pays on time it will give a high score.



Helen Farmer, Head of Underwriting at Tiuta, used to work for a credit scoring lender and now manually underwrites. Helen told us: “When I was at the credit scoring lender the scorecard consisted of 2 parts, the first was a ‘score’ provided by the credit agency which was calculated by the agency based on a number of items which would have included credit conduct, searches registered, financial associations, voters roll information, amount and/or lack of credit.



“The second part of the score was based on the clients information as keyed onto the computer, the lender would allocate (or deduct if appropriate) points for certain information which would have been calculated from statistical information obtained from the lenders own historic client base & loan performance. A number of factors could be taken into account and varied from time to time.”



If for example, there were two lenders who had the same lending policy and one used scorecards and the other didn’t and they were underwriting a case that had unusual income for instance, this would be picked up by the lending policy and would have nothing to do with scorecards. Most likely in this scenario both would come to the same conclusion; whether it fits policy or it doesn’t.



One reason why some brokers welcome scorecards is that you get consistency of decisions. Scorecards don’t have bad days, they do not get distracted, they do not get ill, they do not change jobs or companies – they just do their job. Scorecards are consistent and give decisions quickly. They won’t always say yes but in the event of a no the broker will know immediately and can look for another lender.



Helen Farmer believes: “The scorecard method is possibly more appropriate to a large, high volume lender on standard lending, however from my experience of working in this environment it could become quite frustrating when loans were declined for no apparent reason or, for example, where a credit agency had an item registered which the creditor has admitted was their error but can take up to / or 3 months to correct on the credit agency records and therefore affecting the clients ability to obtain finance until this is resolved. It was also a case of if the computer said no the case was to be declined and appeals were usually not over turned. This type of lending does not allow any flexibility or any underwriting decision making on individual cases/circumstances.



“The lender can also alter the scorecard to reduce or increase lending levels or the level of risk or to reflect a change in their policy.”



Stewart Barnes, Director at Portman Finance, informed B&C that they do not use scorecards, which they understand can be a little frustrating for some brokers, but he said “that it is very rare today to see a deal that would fit a scorecard. The majority of the deals that we see are unusual and ‘one offs’.



“Over six years of lending has demonstrated to us the bizarre range of situations that people get themselves into. This is where Portman Finance works well as we take a very practical approach and will judge every deal on its own merits. This doesn’t mean that we are kamikaze in our lending, we still work to strict parameters, in terms of LTV and viable realistic exit routes, but in most other areas we try to take a pragmatic view.”



However, the sector now relies heavily on the experience and flexibility of good underwriters, especially in cases where a borrower doesn’t quite meet the initial requirements and there may be different options available or indeed other routes with which to work with to secure a bridging loan.



An underwriter can take a view on a case if it is below the credit quality the lender would normally accept.



Alan Cleary, Managing Director of Precise, said: “I don’t know any bridging lender that relies on scorecards.  Some of the noise generated by our competitors about Precise Mortgages relying on credit scorecards is nonsense. Our loans are underwritten manually by a team of experienced underwriters.”



James Bloom, Chief Executive of Regentsmead, told us: “As a principal lender with only lending guidelines we evaluate every case on its individual merits. We treat people as individuals not numbers!”



Nowadays experienced teams of underwriters are more vital and flexible as they check every single case to ensure that a sensible decision has been made and that the scorecards are functioning as expected.



Colin Sanders, Chief Executive Officer at Omni Capital, informed B&C that they “Made a conscious decision not to use credit scoring in its underwriting process.” He disclosed they “Are firmly of the view that bridging is a highly bespoke form of lending. Each case has its own character and nuances, and presents a different risk scenario to any previous case. We are not convinced of the current capability of scorecards to produce a reliable outcome. We will therefore continue to rely on the experience and skill of our specialist underwriters.”



Lenders will take on loans that fit its lending appetite and its views on responsible lending, whether the lender uses scorecards or not shouldm’t really affect this. Scorecards are designed to underwrite cases be it mortgages, credit cards or insurance policies. A good quality mortgage borrower is just as likely to be accepted by a scorecard as it is by an underwriter.



Colin Sanders told us that he believes there are some bridging lenders that so still use them. He added: “I think they are the exception rather than the rule. Scorecards work best in a mass-volume market where their use is cost-effective and their decision-making outcomes generally reliable. A perfect example is the credit card sector.



“Bridging is quite different, both in terms of scale and the risk scenarios presented. I therefore cannot see a convincing argument in favour of credit scoring by bridging lenders.”



But there is the view that lenders who use scorecards are making the lending process harder in that scorecards decline good borrowers that would otherwise have been accepted.



Helen Farmer concluded: “Credit scoring is consistent and will provide brokers with an immediate response however; it is only as good at the information that is keyed in and will not always take into account individual or special circumstances which can be considered by an underwriter.”



By Jason McGee-Abe


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