One of the biggest challenges to small business loan growth for the $5 billion asset Heartland Financial USA has been the time it takes to make a decision on approving a small business loan. Lost time means lost revenue as borrowers will be looking elsewhere while they are waiting for an answer. So one of the recent goals for the Dubuque, Iowa-based company has been to improve its small business lending practice.
First, the nine-bank holding company defined its small business process by loans up to $250,000 (total aggregate commercial exposure) and businesses with annual sales/revenues of $5 million or less.
Normally, underwriting of a $250,000 loan can take two to three weeks. If the only way that Heartland could compete with other lenders was to make timely decisions on small business loans, waiting two to three weeks was not realistic. Heartland would simply lose the customer. Leila Shanoff, senior vice president/small business manager for Heartland, needed an instant credit decisioning solution that would give her access to national statistics so that she could make an educated comparison when evaluating potential borrowers — and quickly.
Shanoff began relying on FICO’s Liquid Credit technology to help accelerate the decision-making process. She now incorporates the scorecard outcomes from the FICO technology into the broader decision process. Once a bank has built a history of small business lending, a loan manager can rely solely on the scorecard to make a decision because it will then have a baseline from which to work, she believes. Shanoff now makes lending decisions in 24 hours or less. Automating the process allows for more efficient use of resources, reduced reliance on manual reviews and the ability to focus on “gray area” applications that need more underwriting attention.
The technology also helps Heartland quickly hone in on the appropriate offer for any particular borrower, without having to manually evaluate all borrower data. Heartland can assess risk, and thus be able to choose appropriate loan amount and product terms by understanding the predictive scores derived by the scorecard. The scores provide insights as to a borrower’s risk level, thereby helping Heartland to manage its overall risk.
In addition, a consistent, transparent system is established that can be demonstrated to regulators when they are scrutinizing lending practices. The solution score reason codes are also crucial in assisting in manual underwriting and addressing other legal requirements. The end result is that more loans can be approved more quickly, resulting in greater revenue for the bank.
How It Works
Various scorecards can be applied depending on the circumstances. For instance, if it is a new small business (start-up) looking for a loan, Heartland can rely on a scorecard specifically designed for an entity with little to no existing information on file other than an application and possibly some tax returns. Thanks to national comparisons and data pulled from a business credit bureau, such as Dun & Bradstreet for example, the scorecards offer insight into a potential borrower’s level of risk.
Heartland is able to customize the data sources according to its lending policies. How all the various information is weighed depends on what information has been culled. The biggest source of information will dictate how everything else is weighed and measured.
Where the decision process ends, Heartland relies on its internal systems to house all the gathered information on a potential borrower. The deal is then finalized through one central system.
Currently, the solution is hosted on the Heartland server, but some banks choose to access the solution remotely via the cloud. Heartland is running this in-house from a centralized unit as that was most convenient for them. Shanoff expects to greatly improve efficiencies and for Heartland to reach its small business goals for 2013.
Sharon O’Connor-Clarke is principal consultant at FICO. For more information, visit www.fico.com.
Copyright (c) March 2013 by BankNews Media