Bimonthly Newsletter | Nov 2020 | Issue 109
Featuring
- Credit Risk Management Post COVID 19
- COVID-19 impact on underwriting -tips to Lenders!
- Tech Bites
- In the News
- Major Events
- Key Stats
Focus On
Best practices in credit risk management post COVID 19
In the wake of the COVID-19 pandemic, credit risk management has become a critical priority for businesses across industries. The unprecedented disruptions caused by the global health crisis have significantly impacted the financial landscape, posing new challenges and uncertainties.
As we navigate the post-COVID-19 era, it is crucial for organizations to adopt robust credit risk management practices to safeguard their financial stability and mitigate potential risks. In this article, we will explore key best practices in credit risk management that are particularly relevant in the aftermath of the pandemic. By implementing these strategies, businesses can enhance their resilience, make informed lending decisions, and effectively manage credit risk in the evolving economic landscape economy of the country is largely impacted by the pandemic, and as a result, Lenders are facing complexity and uncertainty in the business front. The economic fallout created a situation where lenders are experiencing a large number of loan defaults. The rapid pace of change result in challenges for lenders in identifying, managing, and mitigating risks at least for an interim period.In challenging circumstances, lenders can effectively manage credit risk through robust credit risk management practices.
Download the full article to know how your lending firm can best be prepared to handle downstream impacts of the current global situation.
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COVID-19 impact on underwriting-Tips to Lenders!
COVID-19 presents novel issues for underwriters, who are grappling with the need to support their clients accessing funding and also maintain disclosure standards and manage their risk when the typical tools / processes that they use to do so may not be available in the same way. Between changes in borrowers’ employment, delays in tax filing, and ensuring all information is up to date, underwriting has become more of a “real-time” process. For lenders, it is vital to proactively and regularly gauge changes in the status of the borrower and to ensure all things are in place to make for easy and successful closing. For servicers, it is just as important to stay abreast of information on any type of leniency to assist borrowers that may be facing hardship.
In this crisis time a loose underwriting process may put both the lender and borrower in a tough position that causes the mortgage to fall through, go into default, and ultimately create a difficult and stressful situation for both parties.
While navigating this new landscape, what should be taken into consideration during the underwriting process to ensure a smooth closing?
Tips to lenders
More frequent credit check: In this uncertain situation a lot can happen between origination and closing. The underwriting process consists of many moving parts and 30 days can go by rather quickly. It is the lender’s duty to make sure all origination documents are current and meet guidelines. To do so, lenders should check borrowers’ credit profiles and utilization more frequently.
Clear understanding of borrower’s unique financial situation: One other key part of navigating the underwriting process during COVID-19 is taking into consideration those unique circumstances to ensure the business continues as expected. For a lender it is important to investigate the previous or status of loans from other lenders to make sure there isn’t any alarming activity. For instance, if the borrower currently has forbearance on their previous mortgage and is seeking a new loan, that will impact the new loan indefinitely.
Seeking Flexibility for Borrowers: For a lender, while they need to continue the business of providing loans, they also must make sure the loans show no signs of going into default. The lender must also look out for the borrower and make sure they do not get into a situation that could cause financial ruin later.
Conclusion
Since the imposition of public health restrictions across much of the world due to COVID-19, many issuers are facing profound challenges. Here we have attempted to highlight some of the specific impacts on underwriting and what steps Lenders should follow to overcome. While delays and challenges will persist, it remains possible to navigate these complex challenges while maintaining disclosure standards and adequately managing risk.
Tech Bites
Testing Times!! Monkey Theorem and Automation
I almost always wonder if all testers are paranoid. What if it stops working in this way? What if something is missing here, what if it is easily manipulated, and so on with never-ending what-ifs?
In today’s time, what one commonly sees is this paranoia. People worldwide are double-checking, confirming to ensure they wear masks, carry sanitizers, and “testing” if they are COVID-negative. Better to be sure and safe than sorry, right? Friends, often testing software applications, would require such a mindset, even if it is formal testing (structured) or informal (exploratory) testing, to avoid a vulnerability later.
The fun part of testing is finding a hidden problem. And it is important to keep yourself distant. If you are too close to it during development, it becomes even more difficult for you to find the problem. I would recommend that you have a fresh set of eyes before testing so you don’t have a blind spot. Especially while adding new features, it is not only important to validate the current feature but also to make sure nothing in the existing set of features breaks.
Testing over the years has evolved from using the standard waterfall approach to automated tests to Agile testing (faster releases), RAD to DevOps/Continuous testing/CICD approach, Cloud testing, and now to Autonomous testing, Machine Learning, and AI.
Have you heard of the Infinite Monkey theorem? I found this analogy very interesting.
The infinite monkey theorem states that a monkey hitting keys at random on a typewriter keyboard for an infinite amount of time will almost surely type any given text, such as the complete works of William Shakespeare.
Automated scripts could be compared to the monkey. Here, the monkey is not intelligent. If you are implementing a new feature, then validating that feature thoroughly is not enough. “Just because you’ve counted all the trees doesn’t mean you’ve seen the forest.”. However, checking the whole application to see if all is working as expected with the new feature in place would be tedious. Here is where automated scripts help you, that is, in doing “Regression Testing,” better termed as Version Control.
We have heard of and used competing automation tools over time. QTP, Selenium, Cypress, Puppeteer, and Playwright are some of them.
Some of the challenges with automation testing are the use of optimal waits, parametrization, and maintainability.
Feed context to the monkey, train the monkey, make it intelligent, you get AI.
With AI, we can find a solution to these challenges. If an id or Xpath of an element changes, the whole script fails. With the help of dynamic locators, AI understands that if the name of an element or id of an element is changed, the functionality hasn’t changed, just the attribute is changed. Then it searches for the next attribute, say tag name, and if that is also changed, then it searches for the next attribute, say the class name, and so on thus not failing your test.
The wait issues, we often experience, where for one page or button to be displayed, it takes different response times, sometimes the response from the server may take only 2 sec, another time, it might take 15 sec to load. Here, we would have to optimize wait. With AI, we would not have to worry about that, as the time and response from the server every time we ping the server is recorded and then that is relayed for further tests without having to go the server. This would speed up your UI based testing.
Basically, AI has its own self-healing mechanism.
The test coverage is increased. As applications get bigger and bigger, it becomes increasingly difficult, even for experienced programmers, to recognize every interconnection, and I guess an intelligent tool can help with that.
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Google Cloud launches lending DocAI, it’s first mortgage industry tool
Google announced the launch of Lending DocAI, its first dedicated service for the mortgage industry. The tool, which is now in preview, is meant to help mortgage companies speed up the process of evaluating a borrower’s income and asset documents, using specialized machine learning models to automate routine document reviews. Lending DocAI is essentially the first vertically specialized Google Cloud service to use this technology.
Lending DocAI enables mortgage processing time and cost reduction, streamlines data capture, and supports regulatory and compliance requirements. In addition, Google Cloud also argues that this technology can help “reduce risk and enhance compliance posture by leveraging a technology stack (e.g. data access controls and transparency, data residency, customer managed encryption keys) that reduces the risk of implementing an AI strategy.
Lending Club close down their platform for retain investors
There is big news out of LendingClub for their tens of thousands of retail investors. They have given notice that they are closing their Notes platform at the end of the year and individual investors will no longer be able to invest in any loans originated by LendingClub. This is a disappointing development for the industry, as LendingClub was a pioneer in peer to peer lending.
While LendingClub began in 2007 as 100% focused on individual investors over the years it has moved to a much more institutional investor-focused approach. This was understandable as it is difficult to originate huge loan volumes on the back of just retail investors.
As per Lending Club, the peer to peer lending model has not proven to be the wonderful innovation that it promised. There are virtually no platforms operating at scale today that have a pure retail investor approach. UK platform Ratesetter was probably the biggest, at least in the West, and that was sold earlier this year to a traditional bank for a fraction of what it was once worth.
OakBrook Finance launches Open Banking, the first in lending aggregator market
OakBrook Finance has become the first UK lender to return a fully automated Open Banking lending decision via a third-party aggregator by teaming up with market-leading credit scorer and product marketplace ClearScore and data analytics provider AccountScore.
Oakbrook’s new venture offers customers a superior application journey and pre-approved offers which reflect their personal circumstances without impacting their credit scores.
The aggregation play will be delivered through its Likely Loans go-to-market brand and represents the latest stage of an Open Banking strategy that has seen it make significant investments in cutting-edge technology, talent acquisition and building strategic partnerships.
Oakbrook CEO Luke Enock explains: “Our vision is to change lending for the better, and a key component of that is going to come through the accelerated adoption of Open Banking solutions across different channels. “The Covid-19 pandemic has reminded us that traditional methods of credit scoring rely heavily on historic data. To deliver an experience which meets customer expectations and delivers solutions which match their latest circumstances, you need timely data and intelligent decisions at speed. This new venture will create a friction-free loan application journey for consumers. Where a customer has already consented to ClearScore using their Open Banking data for lending offers, this data will then be used to help assess their eligibility for a loan with Oakbrook.
Using AccountScore’s data capabilities and Oakbrook’s own proprietary O6K technology, Oakbrook can process the raw Open Banking data and traditional credit bureau data to return a personalized, pre-approved decision within seconds – giving the consumer greater confidence to apply.
Events
IFINTECH ISTANBUL 2021
9-10, March, 2021, ISTANBUL, TURKEY
Key Stats
Central Bank Interest Rates and Current Libor Rates
| GBP Libor (overnight) | Interest (23-09-2020) | Central Banks | Interest Rates |
| Euro Libor | -0.58657% | American Interest rate (FED) | 0.25% |
| USD Libor | 0.08325% | Australian Interest rate (RBA) | 0.10% |
| CHF Libor | -0.79860% | British Interest Rate (BoE) | 0.10% |
| JPY Libor | -0.10283% | Canadian Interest Rate (BOC) | 0.25% |
| GBP Libor | 0.04763 % | Japanese Interest Rate (BoJ) | -0.10% |
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