The loan software market has become increasingly important due to financial scandals such as Enron and WorldCom, the economic crisis, and new regulations that demand stronger loan risk management, accountability, risk controls, and reporting. In order to comply with new financial regulations, many banks and lenders rely on this type of software.
While large financial institutions tend to have significant investments in enterprise risk management software, smaller lenders are adopting similar technologies. For example, according to an American Banker Executive Forum survey, 87 percent of large banks had enterprise risk management software, but on 24 percent of small banks did. However, 36 percent of small banks indicated that they were planning to implement loan risk management software in the next year.
This technology plays a vital role in understanding and managing loan risk. Below are a few key roles of loan software in loan risk management:
· Credit Risk Modeling – Financial regulations mandate that financial institutions must increase capital ratios to coincide with increased risks. Risk weightings for all assets must be calculated against numerous economic scenarios so that sufficient capital can be set to cover defaults. Software specifically designed for calculating loan risk can be used to model credit risks based on different economic factors and create forecasts detailing predicted defaults, delinquencies, prepayments, cumulative loss, and loss severity estimates.
· Determining Creditworthiness – While consumer credit scores indicate a borrower's credit history and can be indicative of future creditworthiness, the Great Recession took its toll on consumers as a whole. Few consumers emerged unscathed and many consumers with excellent credit scores took a huge financial hit. While credit reports continue to be an important factor, software can look at other factors (such as household data insurance companies, banks, and wealth management institutions) that affect creditworthiness.
· Proactively Address Delinquencies – The "Ability to Pay" index is a predictive risk model used to determine the most appropriate response to delinquent loan payments. Loan software that incorporates the ability to pay index can help make the determination to modify, write off, or foreclose on loans.
· Loan Product Pricing – This is also used to determine the right loan product pricing based on key factors such as creditworthiness and other indicators of risk.
· Risk Analytics & Data Visualization – This type of software helps lenders visualize risk in a more meaningful way than spreadsheets can. For example, business intelligence dashboards can be used to display credit and mortgage risk visually using graphs, graphs, gauges, trend lines, and more. These dashboards can display pooled data across the entire loan portfolio or data specific to a single loan.
· Risk Monitoring – Loan software can automate the risk monitoring process by pushing alerts and reports to you based on thresholds that you set. This alerts you when a threshold has been crossed so that you can respond to both risks and opportunities accordingly.
· Due Diligence – Some loan software includes due diligence tools that connect to MBS pricing in real-time, allowing you to accurately assess the value of your portfolio.
These are but a few of the key roles that loan software plays in loan risk management. Why calculate risk the old-fashioned way when loan software automates it, proactively addresses issues, and helps with compliance?