Optimizing cash flow underwriting: 5 strategies for success
Despite the benefits of using cash flow data, lenders may struggle to understand how and when to use this data. The following strategies will help financial institutions make the most of cash flow data:
1. Use cash flow data to enhance data verification
Cash flow underwriting can aid in verifying data in the lending process. Leveraging this approach helps lenders verify applicant information, reducing the risk of erroneous or misleading data. For example, cash flow data can validate self-reported income and minimize income-related discrepancies.
2. Determine income and employment stability
Direct deposit data can confirm the borrower's place of employment, how long they've worked there, and how often they are paid. Additionally, lenders can estimate the regularity of a borrower’s income streams, providing insights into the borrower's overall financial stability.
3. Leverage additional data in second-look underwriting
A consumer who receives a “pending” or even an initial decline based on traditional credit data may be offered a "second look." Lenders can ask a borrower to provide bank data to determine whether the pending loan might be approved after considering this additional data.
4. Improve loan terms
Most unsecured loans, such as personal loans and cash advances are commoditized. Borrowers care primarily about rates, fees, loan amounts, and loan duration. Offering the best terms is important for financial institutions to grow origination volume in a competitive marketplace. Looking at cash flow data allows financial institutions to offer more competitive terms by evaluating a more robust borrower profile.
5. Get real-time insights into spending patterns
Traditional credit data lags by 30 days or more, which can make it difficult to catch sudden changes in spending patterns. Looking at banking data can help lenders spot changes in spending patterns quickly.
For example, a change to a consumer's average expenses or an increase in non-sufficient funds fees could suggest a borrower may be under financial duress. Alternatively, a lender could detect a higher paycheck amount based on a promotion or job change and then offer a higher credit limit.
