What can a computer tell you that a person can’t when weighing an asset finance proposal?
For the latest Leasing Liferound table, in conjunction with Transition Computing, 11 experts from the UK motor and asset finance industries were invited to the Cornhill Dining Room in London to debate the worth of consumer credit information and the benefit of casting a human eye over any proposal.
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Fred Crawley: What particular work goes on in your underwriting division in terms of scale of operation and how you underwrite?
David Gibson
At Transition Computing we’re not very well-known in the leasing industry. We manage systems that acquire new business and take them through to contract. Our clients include subprime Private & Commercial, prime and captive finance, and Nissan and Renault finance. We have written systems for small-ticket leasing and wrote the Dell Financial Systems. As far as brokers are concerned, we wrote the original Syscap system.
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By GlobalDataMy interest is to understand a bit more about the underwriting process.
Amanda Basham
Barclays Partner Finance provides finance solutions for a number of dealers. We have a mixture of system-automated and manually underwritten decisioning. We manually underwrite around a quarter of the applications we receive.
Paul Sheedy
Liberty Leasing is an independent asset finance company. We’ve been trading since 2001. Each year the book’s gradually grown, at the moment it’s about £33m (€41m). In terms of loan sizes, we provide up to half a million pounds.
Half of the business is prestige or classic cars and the other half is traditional coaches, printing machinery, other machinery.
In the marketplace, we sit behind the first tier, like most of us around the table, picking up deals where the customer can’t go through the normal underwriting procedures, or they’ve reached their credit limits with the prime funders.
The other side of business is bespoke deals, niche deals. A few unusual recent examples include lending against artwork and also providing finance for antiques. We’re a growing company. Hopefully, this year we’ll grow by another 20%.
All of our underwriting is manual.
Peter Nolan
Academy Leasing is a vehicle and asset finance provider. For vehicles, we’re brokerage only.
We write between £1m and £1.5m a month on the vehicle side and a similar amount for asset. We have our own book.
We’ve also got broking lines into the likes of ING, Investec, Siemens, the usual players so we can cover a number of tiers of market.
We write our own book, we probably consider ourselves about Tier 2, the same level as the likes of Close and Arkle.
We are looking at pretty much any deal, of any size; we always try to find a solution for the customer.
We are manually underwriting at the moment. I’m here to find out a little bit about automation so that we can expand the sales performance without having to expand the administration behind it.
Expansion is something at the forefront of our minds at the moment.
Andrew Murphy
SME Eurofinance is a privately held business that was started back in 1988. It predominately operates within the small-ticket asset arena, catering to SMEs.
We have a field-based sales force of around 25 people and another channel in direct relations managed through professional introducers.
We likewise underwrite and broker in the region of £3m a month. Over the last eight years we’ve been developing our own leasing portfolio, which is just shy of £10m. We fund that through a mixture of bonds, blocking facilities and pension fund investments.
Our underwriting is purely manual. We tend to spend an awful lot of time getting to the bottom of deals where other funders can’t actually be bothered or can’t actually get to the deal.
Allan Ross
First Independent Finance started in 1999. We are almost exclusively involved in the SME market.
We finance just shy of £100m a year. We cover from Inverness to Kent. We are purely a broker. We’ve got a very, very small book.
We’re very systems-orientated. The information required for a proposal is collected in the centres of finance companies in a credit claim manner.
We’re only involved in the prime market; we don’t get involved in near-prime or sub.
Paul Caunter
There are three strands to our business. There’s the dealer- and broker-introduced side, which is managed by me; there’s the business-to-business; and there’s our own book, which is managed by the two other directors.
On the motor-dealer side, we obviously look to slot the deals in to the right place so we broke as well and write our own paper.
In terms of what we write on our paper, we write the plain vanilla deals; if the deal’s propped to us and it’s a £6,000 balance over three years for a £10,000 car, 7% flat, that’s our sweet spot.
There also the deals that we call ‘with a story’, where there might be a bit of adverse due to a previous business or marriage failure but the person’s not a bad person and, actually, if they can demonstrate an ability to repay and the LTV is secure, we’ll write that on our own paper, which has certainly helped us open a few doors in to the dealer marketplace.
All our underwriting is manually underwritten by the three directors. We can, generally speaking, either say “no, that’s definitely not a deal to deal with” or: “if you get X, Y, Z, we can do the deal”.
Fred Crawley: What is the single largest challenge facing the management of your underwriting function in 2012?
Peter Nolan
For me, it’s been the automation. ING, for example, if anybody’s experienced it, really impressed me when they first brought in the INGOT system.
To be able to propose a deal, roughly, anywhere up to £20,000 to ING and to get an answer instantly simply gives them a massive chunk of the market.
People, I find, want an answer straight away. They don’t want to hang around for three hours waiting for you to decide if you’re going to lend them a million pounds.
Customers expect you to tell them on the spot. We absolutely can’t do that at the moment.
The top of my to-do list is, without doubt, to underwrite automatically with a system that will enable us to provide those instant answers. Not up to £20,000, if it’s up to £5,000 to begin with, it will take a chunk of my workload away and it will mean I can concentrate on other areas and invest a bit more time in training the staff, making sure the information they’re acquiring before we put a proposal together is accurate.
It’ll make us more efficient as a business completely.
Peter Minter
We’ve been through this process over the past three years. We went from an entirely manual underwriting system, which we actually quite enjoyed calling “artisan”: We’d look at a deal and lovingly craft a solution, and put it back to for the customer to take.
We’ve gone from that to a portfolio basis of underwriting risk, fully automated, in the subprime environment, where, with a certain amount of information, a decision can be made programmatically, as fast as a computer can work and the wires can transmit it. That’s been a big change for us.
The biggest change you have to go through when you do that is leaving a situation where you are honestly, excitedly underwriting, and I honestly believed I was much better than any computer could ever be.
Then you go back to actually look at the results and the fact of the matter is you really can’t beat doing it the same way, day in, day out, using a set of defined rules.
Thinking about what those rules are, making it an automated process, takes time and it takes an awful lot of guts to just let go.
On a portfolio basis, if you apply the same rule, day in, day out, you know there are going to be some proposals going wrong, definitely, but you know also it’s only going to be 1%. You just don’t know which 1%.
The challenge now is that, if you move to that sort of an underwriting approach, it’s based on past experience, on credit scoring and so on.
And past experience never is a particularly good guide of future performance but when you’re in the middle of yet another recession, a double-dip, and the nearest source of information is your own book, before the credit crunch and all the rest of it, or Experian, Equifax, CRAs over the same period – way back, before they start analysing it – the question that is exorcising us at the moment is: Are they up to the job when the way in which people use credit changes?
Peter Nolan
I would just counter: Running by a set number of rules may not work for some of the business that we write.
We know that if we’re underwriting an asset, for example, it might cost £30,000 for an MOT station for a garage. If you look at their credit profile you’d think there’s no way in the world they’re good for £30,000, but if you understand the asset, you know it’s going to make them £500 a week, minimum, and therefore, over a five-year period, it pays for itself in no time.
I can’t really get my head around how you teach a computer to understand enough about an asset that you don’t lose the business in the first place.
MOT stations have got really good residual value and pay for themselves, provided the customer has some experience in their field.
The rate you can charge for a subprime company, because people only look at the previous performance, is definitely well worth taking the risk.
If it does look quite poor but you’re knowledgeable about the asset, you know it’ll get paid for, even if it can’t be paid for now. Once in use, it generates its own income and you can charge the rate accordingly because nobody else will do it.
Nobody else is looking in that much detail at what it is you’re actually financing. That’s definitely the benefit of manual underwriting.
Paul Caunter
With us, there are two common deals that we write on our own paper: poor asset in terms of asset security but low risk hirer, or some historical credit impairment we ensure we are safe against in terms of loan-to-value.
Typically we are not ‘strong and long’ lenders on our own book, especially if there is some adverse credit – 80% LTV over three years is our preference.
We have seen two cases where the car’s been voluntarily surrendered in the last couple of weeks. In both instances, we managed to sell the vehicles and clear the outstanding debt and costs without incurring any loss.
Our bad debt last year was less than 0.1%. It might be said we’re not lending enough but we want to ensure we are lending responsibly to people we believe have an ability to repay.
If automated, we would miss the opportunity to do some deals thrown out by the system, for whatever reason. Instead, we’re looking at proposals ourselves and finding deals are possible with a bit more deposit or with suitable guarantors. That’s the danger in terms of automating, from our point of view.
Paul Sheedy
I think the more niche the deal, the harder it is to apply an algorithm to underwrite it for you. A person has to look at that proposal.
If you’re trying to move into a market where you want to be a sausage machine and most of the deals are exactly the same – cars, for the sake of argument – then it becomes a lot easier to do that.
Some of the deals that have been coming across our desk are so bespoke and unusual that it’s hard to imagine how you would come up with a computer solution to underwrite that particular deal.
Fred Crawley: When lending to SMEs, what would you say are the most vital pieces of consumer credit information to you?
Helen Reynolds
We have, because of the nature of our business, some fundamental black and whites when it comes to decisioning: Populations where we will definitely not lend to, populations where we are definitely happy to lend to, and then we have our population in the middle that we want to look at in more detail, which is why our manual underwriting function is key.
Allan Ross
It’s quite simple for us because we are only involved in the prime market.
The actual problem we have is, very often, the finance company will turn people down, not tell us what the problem is and they’ll throw the Data Protection Act at us.
That can be a problem when you find out through the grapevine the guy had a bounced credit card payment in June last year when he was on holiday.
Our problem when it comes to information is not being provided with all of the information from the finance company. We are first-time underwriters from the perspective of: we look at accounts, bank statements, information supplied and so forth but, if there’s anything in the background of that, very often finance companies won’t share their information.
It’s interesting this whole story about automation in the motor trade, starting with Mercantile Automated Credit Scoring in 1982. I remember them bringing in Mercantile automated credit scoring system, called Macs, and the branch managers were going nuts because, basically, on a Monday morning they were being told ‘you cannot underwrite’.
And then they introduced the 3% overrider; they were allowed to underwrite 3% – for the same arguments going around this table – and that people can do things better than computers can.
Within a year they realised that most of the defaults were coming from that 3%. Shortly before they sold it to GE, they realised the computer, in most of the cases, is the best way to go.
The actual intervention of human beings very often brings an emotional connection between them and the dealer or an introductory source that puts a slide on a proposal and actually introduces more problems.
From my experience, there is an algorithm that can be written, regardless of where you are in the market. It’s just the terms of that algorithm that need to be altered.
David Gibson
The systems we’ve written: If you look at small-ticket leasing, like Dell Financial Services, if anybody touched a deal, they’ve probably lost money on it. You would have to look at automation.
If you look at Private & Commercial, they reject automatically. This enables them to focus on the deals where they can make a difference. You also look at automation for service improvement. Documents are being passed backwards and forwards to the broker. Private & Commercial do that all electronically, and attach it all to the deals.
If it’s a peculiar asset, I imagine you’re always going to look at it. The automation may actually be the improvement of capturing the credit data on the customer so people don’t have to do that manually.
I think automation is not always to make automatic credit decisions, it’s down to: Is there a process improvement? Can we be more efficient? Will it enable you to focus on the deals you can affect?
That’s really what I’ve learned from the work that we’ve done.
Fred Crawley: Is anybody looking to both upscale and continue to underwrite manually? Where are you going to tighten things to increase efficiency?
Paul Sheedy
I suppose, being an underwriter, you don’t want to be replaced. Therefore, it’s always going to be something you put on the backburner. We are looking to increase our share of the market and we are seeing more proposals. The problem with growing and having manual underwriting is that it’s hard to maintain a good consistency of service to the brokers that you are dealing with.
I’m sure a percentage of the deals we see could be underwritten by a computer quite easily. From our point of view, we would probably look to do a mixture at some point, depending on how many proposals we were receiving. We have three underwriters ourselves; my colleague and I do most of the underwriting, the chairman being involved the larger transactions.
That’s the other thing: Some of the deals we’re underwriting now are up to half a million pounds. We wouldn’t want a computer to make a decision like that, of that size. I can see the advantages to it on a small scale, especially when you’re growing.
Paul Caunter
All of our underwriters are owners of the business, as well. If it goes wrong, it affects us in our own pocket.
Fred Crawley: How would you go about enlarging that resource if you ended up with more propositions?
Paul Caunter
The internal accountant managers manage the new business proposals effectively, and are of a standard to put the proposal together and pass to the directors to underwrite if they believe we should be writing the deal.
All of our searches, the CAP valuation and the bank statements are in one place. They will put the deal together to a standard where they can decline a deal if it comes in. They can put it to a position where, yes, we should do the deal, it’s just a case of us performing searches and making sure all the boxes have been ticked.
Fred Crawley: Is filtering out the non-starters the point to begin from, rather than the auto-approvals? Is it easier to build automation in to the declines?
Paul Sheedy
That would be the first place you’d start.
Peter Minter
It’s probably the first step.
Peter Nolan
I’d still want to take an hour out of my day to review all the declines. It’s so hard for me to let go of them. It’s having the faith in the technology. You’d never have used it before.
Oliver Mackaness
I used to underwrite every single deal that came in and, actually, it’s better now that I’m not. I was either too cautious or sometimes I’d think ‘go on, let them have a go’… But, actually, now, having three dedicated people that are doing it, they’re doing a better job than me because I haven’t got time to. That’s full time.
That was when we were quite small, we broker quite a lot now. It was quite a big step to let go of that process and I’m actually really glad we did. The next step would be to automate it even further.
Although we’re manually underwriting, everything around that manual underwriting is streamlined as much as possible. We took a huge step to accept fax payments or email payouts two months ago but it saves so much time. There are three underwriters who write so many more deals now than they could two or three years ago because we speeded everything up. Everything else is now as automated as possible.
Gary Hill
You want your underwriters underwriting, you don’t want them sorting through rubbish proposals and anything else. We try to have good relationships with the brokers and although it’s manually underwritten we do have things that are set in stone, mortgage arrears being the number-one example. If somebody’s not paying the mortgage we will not finance them. Full stop, end of.
That’s a number one no-go. It’s our company policy on that but there are similar circumstances where we could say we’re not going to accept a proposal. We try to feed that information back to the brokers so that if they’re doing the initial search on a customer before it comes to us they’ll know there’s no point sending on a proposal, we’re not going to touch it.
If you’ve got some basics in place there and something passes that very basic, initial test, in theory, the guys should only be looking at proposals they can do something with. Although it’s quite basic, if it cuts out a lot of these instant declines, they’re looking at stuff they should be able to do something with. It’s basic but it works.
Fred Crawley: Seeing feedback from a broker perspective: Do you feel that you’re getting adequate information from your funders when you get a decline? Do you understand what they’re looking for? Could that be improved?
Allan Ross
The answer is: probably not. There are two reasons for it. The first one is the underwriter, very often, doesn’t want to tell you why they won’t want to do a deal because it opens the conversation up, eating into their time, becoming emotional. We try to keep our sales guys entirely away from the underwriters to reduce that happening.
The second reason is I think there is a fear that if information is passed to the broker the client will throw the book at the finance company for sharing information they should not have shared.
That goes right through the system from the underwriting decision, even through to the default process. We want to get involved in any default there is, we are keen to get involved in repossessing and keeping costs down and keeping loss low for our finance partners, but the collections department don’t want any third parties involved that they are not in control of.
The brokers are seen as the people who introduce the business and then leave everything else to the finance company, and it doesn’t always work for finance companies. I think a lot of improvement can be done.
Paul Caunter
It depends which funder you’re talking to.The deal may come in as about 4% flat, where it’s not where we want to be on margin, it goes to one of our funders. If they decline, we speak to the funder and they say: “Actually, the customer just missed our cut-off point. We then do our checks and, for example, yes we can do it but it’s 7% flat and we need another 10% deposit – we write a lot of business this way.”
It really depends what relationship you’ve got with your funder, most of them now know the type of business we write ourselves and, more often than not, we actually syndicate deals together!
Fred Crawley: Does CCD or any other changes up ahead have any impact on SME business when you’re looking at sole traders?
Paul Sheedy
Definitely, when the threshold of £25,000 was removed. It used to be that anything over and above that amount meant you could finance a car in an individual’s name, on an unregulated basis. Obviously, now that’s regulated it isn’t so attractive from a finance company’s point of view. These agreements are very much weighted in the customer’s favour. It creates a problem for the finance company if you’re not set up for that kind of business.
We don’t get involved in regulated deals. We do the odd one or two but only if we have to. That took a chunk out of the marketplace for us when this happened. It restricted our market. Deals we were doing before CCD, we couldn’t do anymore on an unregulated basis.
Fred Crawley: Were SME Eurofinance ever looking at regulated business as a component?
Andrew Murphy
Not generally. We underwrite an awful lot of variety, a mixed bag of deals, so to automate the underwriting function would be problematic. However, everything around it: gaining information, the proposal flow and so forth, could be automated to drive a lot more efficiency into our business.
It doesn’t take long to take a decision if you’ve got all the data in front of you. We’re not a sausage machine, we may have half-a-dozen deals a day, if we’re lucky, so it’s not taking an awful lot of time out of anybody’s life to look at those deals.
Fred Crawley: How has the way you use credit information and underwriting changed over the last year? Is everybody here using Experian?
Peter Minter
We use Equifax.
Andrew Murphy
We use Creditsafe and Experian. Experian for CAIS information, which allows us to make much better decisions.
Mark Smith
I changed supplier, to Call Credit and found a significant difference between the two data sets. I looked at all the three of the “major suppliers”. Call Credit’s an emerging one. But most of the main lenders send their data to them. What I’ve found is that Call Credit get a lot more data that the others don’t bother collecting, or don’t have the ability to collect, such as doorstep lending, the Provident-type loans, the pay-day lending, rent payments, utility payments, white good payments, which people are getting more and more of.
They provide a data set which is useful for us. We lend in the subprime car finance market, if somebody’s got a default five years ago, it’s unlikely they’ve had any tier-one funding since then but they are likely to have had borrowings in other places such as BrightHouse, Provident, Wonga, etc.
You can see the credit profiles. If somebody’s been paying a doorstep loan for the last five years and had 10 different doorstep loans, they have a proven ability to pay credit whereas another referencing agency might suggest that they’ve had nothing, which is clearly not the case. It’s a much better data set for us.
Fred Crawley: Is there any data anybody wishes they were getting but can’t?
Peter Minter
Income data would be really useful. I’m not sure how we’d collect it but in the States there’s much-freer availability of income data; how a potential customer is earning.
Fred Crawley: That’s not available from any source here?
Peter Minter
Well, they sort-of say it is. You really can’t base any decision on what’s available. Call Credit we’ve just started looking at. They seem to be more proactive.
But we moved from Experian to Equifax and the thing that struck us as extraordinary was they are all working, except for some of the things you’re talking about, from the same sorts of data and have fundamentally different records against each person. It’s hard to imagine how that can be the case.
Oliver Mackaness
They should be sharing the same information.
Peter Minter
They do share information but it’ll come up, still, fundamentally different. We were turning stuff down on Experian, based on CAIS data, and we’d be sent an Equifax report on the same person showing fundamentally different stuff.
David Gibson
We’ve just implemented something that we centred on finance. We couldn’t reconcile the test environment with the live environment.
The testing was complicated by Experian configuration parameters, and the fact we were using a new Experian infrastructure.
Peter Minter
Call Credit has shaken the market up a bit and that’s really good news. Otherwise, it was getting a bit comfortable.
David Gibson
From a technology point of view the other data providers are not restricted by the legacy systems they have in place, and can take advantage of advances in technology more easily.
Andrew Murphy
We use Creditsafe for pre-screening. Their reports are quite cheap by comparison to the main credit agencies and it gives all the essential information that would allow us to decide whether we broker a deal or underwrite the deal in our own book. It allows us to pigeonhole which funder might look at the deal if we were to broker it.
If we decide to do it ourselves, we then go on to the Experian report, just to dig out all the dirt and CAIS. We find quite a lot of information on CAIS.
Fred Crawley: They’re good for a first line because they’re better from a cost perspective?
Andrew Murphy
They identify CCJs and the like, which are no-nos to a lot of funders.
From a broker perspective, do pre-screening based on information that falls back. It could be automated, which funder the deal goes to.
David Gibson
We have come across that with large brokers who pre-screen the deal to determine which funder will take the deal, where they have block commitments and if they are met, and then which funder will provide the best margin for them.
Allan Ross
The majority of our business is face-to-face with our local area manager. So they know the customer. We don’t tend to do on-the-floor business coming through the motor dealer, it tends to be a group financing cars with somebody we’ve known for a long time.
The information we tend to get is accounts, bank statements and debtors’ lists. We get this kind of business for all the decisions we are making. What we occasionally use is a very simple programme called RiskDisk which, online, gives us the last accounts of customers that are not particularly visible to us. And it works in the SME market.
Peter Nolan
In terms of second-guessing funders, I do that manually. I know that if we’re going to write something on our own book, I want a particular rate for Academy Leasing. I know that if it’s going to Siemens then we’ll get back to whatever their rate is.
When a deal comes in I’ll take a look at it and if I think it will go through underwriting at Siemens, for example, I’ll let the salesman know his commission. When the document comes in I will send it to Siemens and if they decline it I will stand by the Siemens rate and take the hit on my own book.
Or, if the deal gets funding, fair enough but a lot more may have been paid as a percentage than if it had gone in our book from the start. So the information probably would be of interest, if it was good, as it saves me making mistakes. They obviously are quite expensive. If you’re doing a deal you think will be taken by ING Lease at 5% or 6%, and then doesn’t, you have to find somewhere to put it because it has been accepted and the salesman has been guaranteed a commission.
Paul Caunter
On the asset side, though, from viewing a report from Companies House, you’ll know, from the strength of the balance sheet, the business and what rate they’ll actually buy, and where you’re going to place the deal.
More often than not, you’ve got to win the deal first before you actually propose it anywhere.
There’s no point in going to a tier two funder for a business that has a good balance sheet and they’re financing a piece of plant, because you may not win the deal and the rate agreed with that funder. There needs to be an element of pre-underwriting before you place the deal, to ensure it goes to the funder that you are going to win the business with.
Allan Ross
You get that view from most finance companies where they accept it. On our systems, of all our pricing calculations in there, you put forward the deal you think the customer’s going to accept, hit a button and then it tells you the commission is going to the finance company.
A lot of finance companies make an incorrect assumption that we just give it to the company that pays the most, but the speed of payment might be important, or actually having an appetite in the first place might be important, or perhaps we know that the most competitive finance company may not like the equipment, or the industry, or whatever.
Over time, we would get a good feel for who will have an appetite for it. A funder might be number six on your list but they’re the most appropriate funder, and that’s what customers are buying from people. The broker saves them a lot of time and effort by finding the most appropriate funder for the market. So we’ve got a system.
Fred Crawley: What do you see as the biggest obstacles to your efficient use of credit information?
Peter Nolan
The majority of our asset business is introduced by suppliers and they’re not really interested in what we want in order to fund an item or to do credit searches. They just want us to pay their invoices.
Generally, a lack of information that we receive in the first instance means that all the admin staff – my underwriting, my administrators – have then got to ring around after a customer, trying to get hold of them. Which seems completely ridiculous to me when we’ve had the man who sells the kit we’re trying to finance sat in front of that customer, selling the kit, and getting them to agree to do it.
We have, on countless occasions, tried to provide lists of questions that we will ask and they will fill in, provide us with the information that we would have to ring up and ask for so that we don’t have to spend two out of three days chasing after somebody who doesn’t answer the phone.
For example, the medical profession –they’re impossible to get hold of during working hours. I generally ring them about seven o’clock at night while I’m sat in the office, or ring mobile numbers because I can’t call them during working time because they’re busy.
We only ask for information that any Joe Bloggs with a consumer credit licence could get so supplier education would, certainly, improve our efficiency and make sure we got all of the information needed straight away. It would probably cut our underwriting time in half before automating anything with a computer.
Peter Minter
Then the manual side comes in, some things you have to do manually. Affordability is one are which can result in manual work but you have to notice the corrections on credit reference agency records where the customer has said: “I know it looks like I never pay my bills but obviously I don’t normally behave like that”. Small brackets: “Actually, I do but I don’t want you to think it.” Thus, you have to look at those.
If there’s a warning, you have to look at that as well. Certain things will get looked at. You’ll never automate underwriting completely.
Fred Crawley: What perhaps is the most important, first thing to teach a new underwriter? Or the major misconception you would want them to avoid?
Peter Nolan
We are, or I am, trying to encourage the admin istration team to get an idea of what I’m looking for. If they see a deal in their searches and they spot a major flaw or a gap in the information, they will just ask for it straight away rather than sending it to me first, for me to then send it back to them, sort-of pre-underwriting.
One thing I always tell them to avoid is: Don’t get excited by a big deposit. Sometimes, people will give you a big deposit, take the asset, sell it on, and never pay a penny.
Helen Reynolds
We have a structured training programme for our manual underwriters which includes setting the scene of what our company is, what we do and the type of business areas we write in. I think it helps you then when you get to the point of making decisions to understand what your business is and what your business appetite is.
Paul Sheedy
I suppose I can only say what I’ve been told: attention to detail. And, if it’s too good to be true, it probably is. It’s experience, really. As an underwriter, you make a few mistakes. Hopefully, you learn by those. Take the experience with you when you’re writing future transactions.
Andrew Murphy
One of the pearls of wisdom I was given when I started out in the industry years ago was: never rely on the asset as its own get-out value.
The MD of the company I worked for at the time funded an expensive piece of plant, thinking if anything went wrong, he would repossess it and take the proceeds. Unfortunately, the customer drove it in to a big hole so there’s nothing he could do about it. That was the lesson I learned.
Allan Ross
Well, it’s a bit different because we don’t underwrite; we’re looking at it from the other side of the fence. I was in motor finance all those years ago so I can understand where you’re coming from.
If you’re dealing with a finance broker, there are some very good finance brokers out there who actually do know the customer probably better than any underwriter. It’s figuring out who those brokers are that you can work with. I don’t think the finance industry do enough of that, they tar all brokers with the same brush. Some try hard not to but inevitably you see a lot of that going on.
Finance companies must work much closer in partnership, cradle to grave, in the business they do with their brokers and being able to identify the brokers they can do that with and the ones that they can’t.
Paul Caunter
The nature of the introduction is quite important, as well. We take our business from brokers that we know and are owner-managed businesses. If there’s a problem, they’ll help sort it out. We are more cautious with leads via the internet as we are another step away from the customer.
If it’s coming from somebody we know, they know the customer, it’s a lot more comfortable to look in to it in a bit more depth.
Fred Crawley: Talking of incentivising underwriters, does anybody do this? Is it common?
Gary Hill
We didn’t incentivise traditionally. It’s only something relatively new that we’ve brought in. If underwriters really do buy into it then they do take a lot of pride in their job and get a massive satisfaction.
Our results last month were practically the best they’ve ever been. The underwriters were absolutely chuffed to bits with it. They see the results of their efforts.
The underwriters deal with the brokers directly as well. We could all write more business if we just accept anything but it’s about getting the balance right.
The underwriters have good relationships with the brokers and it is finding the line between not letting the broker talk them in to doing stuff that they don’t want to do but, obviously, accepting the right business. They can turn a decline around to explain to the broker the reason why the deal was declined or advise not to accept a deal that may bring back debt in a commission.
It certainly makes underwriters take a lot of ownership into their decision and their job. They trust their decision. It’s worked really well. It’s surprising how into it they are. They may get a financial reward but it’s more about the pride of recording best-ever quarterly results.
I would recommend doing something for your underwriters if you don’t already.
Peter Nolan
I just make sure the decision I give to the sales guys gives as much detail as possible. I know my sales guys so if I decline a deal I know exactly what they are going to ask. I try to pre-empt that question and I answer it on the decline notice. If they want to send that to their supplier they can do but ultimately if the deal’s bad, the deal’s bad.
I’ll always invite them to come and have a look at the credit report with me because it’s a statement within the company.
I won’t show them personal credit, obviously, but the publicly available Experian report: that’s why we’re not doing that deal; you wouldn’t pay for it out of your pocket, no.
Peter Minter
It goes without saying that if you automate the process you don’t want to incentivise a computer particularly. In the margins of where we and the underwriters operate the incentive is to follow the rules. We are far more rules-based and far less judgemental. The systems and measurements are designed to make sure the rules are being followed as much as anything else.
Fred Crawley: What is the single factor limiting the number of proposals that each underwriter or business can handle? Could automation be improved while maintaining the same risk appetite?
Helen Reynolds
I suppose it’s complexity of the case. No two cases are the same. One case may take five minutes to review, one case may take two and a half hours.
Allan Ross
There’s the contact between the broker and the salesperson, as well, and the underwriter: Is that not a huge waste of time for a lot of businesses in the market?
A lot of finance companies, or some finance companies, seem to encourage calling and chatting about a deal.
It’s always a struggle with your cost-benefit analysis. You find your underwriters are spending 20 minutes, 20 times a day, speaking to people about deals that they already know they are going to decline. It doesn’t make sense.
Peter Nolan
I’ll jump in there. I used to do it and I used to get wrapped into those 20-minute conversations with suppliers who just don’t want to take no for an answer. And, ultimately, the answer is no. I’ve banned my salespeople from putting suppliers through.
Fred Crawley: It just becomes objection-handling, doesn’t it?
Peter Nolan
Exactly, it’s the salesperson’s job to sell the rate that they think the end-user thinks is too high, where he has to sell it.If there’s a reason for a decline, he has to present it and maintain the relationship with his supplier. That’s his part.
I understand knowing your customers really well helps from an underwriting perspective, but I felt, in some cases, I was doing deals that I probably wouldn’t have done because I don’t want to do knock loads of deals back for a particular individual.
Allan Ross
We don’t encourage it at all, we ban it. We ban that sort of connection between the salespeople and the customer and the underwriter because, when it does get emotional, it ends up ruining the relationship between us and the finance company.
We train our people to make sure they get it right first time and get all the information to be able to help the underwriting decision.
We just do not encourage that contact but I’ve noticed a few finance companies now who are suggesting it’s a great way for them to do business, that first, direct contact with the underwriter and our people.
Paul Sheedy
From our point of view, because we’re a small player in a big market, we try to get to see brokers regularly, face-to-face.
We’re trying to remind them we’re still around, we’re still lending, this is what we do, because the brokers won’t be dealing with us on a regular basis, most of their business will be proposed to the prime lenders.
The way we train our sales guys is to be knocking on doors, seeing brokers, building relationships.
Strong working relationships are good because we do rely on the broker’s opinion, as well. If you think they are a good broker, you’ll take into account what they say, especially when underwriting a proposal. We try to actively do that and encourage a very close relationship with a broker. It seems to work. Occasionally, obviously, you’ll have the odd one that doesn’t.
Overall, it works very well, for our market, anyway.
Paul Caunter
Our business isn’t like that because, whilst we’re a lender, we’re also a broker. We might have no deals to write ourselves.
One day, it’s all PCP agreements from the dealer or no-fee agreements, which we will write with one of our funding partners. The next day, it’s a different story.
It’s difficult to say how many deals will be underwritten by us as opposed to one of our funders: in a typical day, each day can be very different to the next!
Helen Reynolds
I think it’s what we try to encourage. We don’t want our sales managers querying every decline decision as that’s not productive.
However, if there is additional information available that could facilitate the deal, thus giving a viable reason to appeal the decision, then we’re happy to have that conversation.
Gary Hill
It’s good to have these things rationed with brokers, as well. We’ve tried giving a bit of personal service. We’re not massive, it’s not a computer making a decision, you can talk to us.
Helen Reynolds
We try to have a very open conversation with our sales managers to keep them informed of the things we do so they’ve got a better understanding of the rationale behind our decisions.
We maintain an open communication channel with our sales team on an ongoing basis. Obviously, if ever a particular issue came up we’d have a meeting and get everybody together.
Fred Crawley: Cast your minds a few years forward in the growth of your business: What one change, in technology or the external market, would you wish for to help progress your underwriting business?
Helen Reynolds
For us it’s probably just data, generally, and the availability of it; bringing better and more information in. Making sure we have the best tools and the best information with which to make our decisions.
Paul Sheedy
I suppose one of the things that might happen in the next few years is you might be able to email docs to a customer and for them to electronically bind themselves to that agreement, that would make things a lot more efficient.
Mark Smith
It’s regulation. You are always trying to second-guess the future.
We have never had a single complaint go to a regulator. I want to maintain that but I don’t think it’s fair that somebody outside of the judiciary system can make a binding decision on a lender when it’s not binding on the consumer.
Peter Nolan
I’d probably echo what Helen said, which is: quality of information. Get that in the first instance, it would probably half the administration staff we’ve got at the moment, the salespersons. Give it to me in the first place and enter it on to an automated system, or at least partially-automated, and it would cut our costs massively.
That’s ideally where we want to be but it’s getting that quality of information in the first place that’s the problem.
Andrew Murphy
More of a pipe dream than anything else: It would be great to have a similar facility that car financiers have with HPI, to register a security interest over an asset, but to extend that to different types of asset used in the business, so they don’t get refinanced several times over, just to reduce fraud.
That’s not strictly to do with underwriting but it does have a knock-on effect.
Allan Ross
There’s actually two: The first one is legislation, absolutely. Strangely enough, what I think is happening with the legislation market is that it’s driving more customers away from the prime market and it’s actually creating more of an opportunity for the near-prime and subprime funders. Which should be good news for a lot of people sat round this table.
What annoys me about legislation is that you tend to pick things up. I can’t remember anybody, in the time that I’ve been in business, asking me how much commission there is. Ever. Never happened. And we write a lot of business.
And yet the FLA has got a discussion document going around finance companies just now about this whole question of whether we should disclose commissions or not, when there doesn’t seem to be an issue for anybody.
Peter Minter
There’s regulation out that says ‘if you’re an intermediary, you have to disclose it’.
You have to disclose the fact of it and, if they ask, then how much. And that’s what the FLA regulatory document is about.
Allan Ross
If you look at what the FLA release, it seems to be offering guidance, taking it a little bit further than that.
Nobody asks the banks to disclose how much profit they’re making on a transaction, but a deal that’s done with a bank is exactly the same scenario as a deal that’s done with a broker. The broker’s automatically in a more difficult position.
I don’t think it adds much value to the consumer. You see that happening with CCD. What value does this add to the consumer? Some of the documentations are ridiculous. It’s a joke. Does it get implemented?
Legislation is fair to the consumer. Legislation seems to be keeping an industry employed and come up with even more reasons to cause the industry more of a problem. It’s out of order and it does seem to be coming, not going, for the industry. That’s one of my pet hates.
The other thing is we’ve got sales guys in this industry who need to be able to change more as, particularly, technology improves. I see quite a resistance to that happening. I think it’s an inevitability.
There is going to be more technology in our industry and we’ve got to adapt to that fact and go with it. I think that’s an opportunity that a lot of us are actually missing. That changes in the next few years. At the sharp end, they’re used to using technology in a manner that’s going to help businesses a lot more rather than putting up barriers.
Paul Caunter
In terms of our own book, we know about 60% of it is wheeled assets, and 40% is other assets but we can’t quite drill down to how much money we’re making out of the other assets against the vehicles.
Should we be charging higher rates? Those car deals that have got a story – where we will write at around 7%- 8% PAF – we haven’t got an endless amount of money we can lend but we might be better off lending it on other assets, where the asset security is not as secure as vehicle finance but the interest rates charged are typically higher.
The other thing is getting the team trained up to a standard where they’ve got a mandate as an underwriter, underwriting deals, and it hasn’t got to be underwritten by the directors, although our underwriting policy has served us very well so far!
