Beyond approval in credit underwriting

One of the main activities in credit underwriting is assessing risk.

Lenders assess risk to decide whether to approve or decline a loan application.

But credit underwriting doesn't stop at the credit decision.

Another key function of underwriting is to establish risk-adjusted credit terms, such as:

• Credit Limit: Max credit amount and term

• Credit Price: Interest rate or associated fees

And that's what credit underwriting software should account for.

At first glance, setting credit limits and pricing might seem straightforward.

You could imagine using the same decision engine that powers approval decisions.

But when translating this into software design, some questions arise:

• Where should these terms be stored?

• Are they part of the loan?

• Or are they part of the loan application?

And the answer isn't so obvious.

The problem is that there's no loan at the credit underwriting stage.

The loan is an actual financial agreement that is active only after it is signed.

Nor do credit terms fit squarely into the loan application entity.

A loan application represents a credit request.

So if a loan doesn't exist yet and credit terms are foreign in a loan application, where's the place for them then?

Credit offer.

A credit offer is what a lender makes to a borrower based on their loan application.

It isn't a loan yet, but it contains credit terms for a future loan if it is accepted by a borrower.

The credit offer entity sits between the credit application and the credit (think loan, credit line or payment plan).

During credit underwriting, if the credit application is approved, the lender:

• Creates a credit offer

• Decides on a credit limit to offer

• Decides on an interest rate to offer

Using a credit offer entity in software design also has broader implications.

Credit offer is a part of many use cases downstream of the underwriting:

• Sending an offer to a borrower or a broker

• Offer acceptance/decline or expiration

• Counter offers and multiple offers per credit application

All of these would be hard to implement if credit terms from underwriting had been merged into the application or a loan.

Credit underwriting doesn't end with approval but also involves establishing risk-adjusted credit terms.

A credit offer entity can be a good choice to persist them for maintainable software design.

That's it for today.

I hope this gave you some useful ideas for building better lending software.

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