From Medicine to McKinsey to Main St

In an era where loose mortgage lending alternately juiced and now bankrupted lenders and financial services companies, the lax approach to underwriting is a clear culprit.

I’m personally pissed off at by Wells Fargo’s loan division (and considering moving all my business to another bank due to this lack of desire to serve my business’s needs), which rejected out of hand a line of credit for my business due to “number of inquiries on my credit line”, regardless of the limited nature of the loan request or any knowledge of my ability to pay.

Its most vexing because I offered several times in the process to supply proof of income in support of the loan– which has a number of inquiries from my recent marriage and the start of an independent business (C-corp requires separated accounts, but all are secured against my personal credit). And through the process, I was told that this would not be necessary. As many who’ve been put on hold by financial institutions would attest, customer service is not these companies’ forte, and Wells Fargo (and B of A) have made several “worst” lists.

At the heart of all of this mess is poorly utilized information from 3rd party intermediaries– ratings agencies like Standard and Poor and Moody’s in mortgage to Fair Isaac and the credit scoring agencies.

As the quants have discovered with “foolproof” models, there is no substitute for the use of human judgment and a full qualitative and quantitative understanding of a risk in context. The financial services industry is guilty of automating tools using incomplete information, setting themselves up for pissing off customers and having their lunch handed to them by those who abuse the system.

Good underwriting is supposed to understand risk and price accordingly
It is no surprise that risk is composed of 2 major components: ability to pay (income-obligations) and financial discipline (paying on time).

Banks, surprisingly, have omitted income information (let alone any documentation) from many credit applications. In fact, they reap rich fees from folks who are closest to the edge. And their mergers have tended to reward the “best practice” of using cheap, automated approaches to substitute for training or judgment.

The credit score is an indication only of past financial discipline, and ballooning credit balances (despite on-time payment of minimum balances) may be a sign of increasing risk.

As a small business owner where business credit needs are combined onto a personal credit score, this approach to treating all inquiries the same (despite a low levels of obligations or more than sufficient income)– and not even bothering to check for additional metrics to justify a turn-down is simply bad business– you’ve pissed off a customer and likely lost their account. Why you spent so much trying to get the business only to have it leave in a huff is beyond me.

In the current era of consumer empowerment, this heavy-handed approach is a sign of a business ripe for disruption. Where Commerce Bank has shown that service means something in retail banking, there is new opportunity to redefine the loan market to improve the use of context in making solid lending recommendations and creating multiple options for consumers to choose (rather than make binary yes/no decisions). Who will be the Capital One of the lending industry?

Addendum: After overriding the “senior call center specialist” and talking to a manager I did end up getting a line of credit. Now, nobody knows where it is, as the SBA department isn’t connected to the checking department.