Starting our series “Industry checks and balances” – at its core are reliable credit decisions. In an era where most of those on the origination side know little about how sound credit decisions are made; With the advent of credit scores and score matrices vs. LTV vs. DTI ratios, this question is critical to the long-term survival of individual careers and the industry as a whole. We will explore most of the “checks and balances” needed over the next several months.

Sound credit decisions are based on the 3-legged stool custom, NOT ONLY A COMPUTERIZED CREDIT SCORE. Character, capacity and guarantee: it is that simple, but that complex. As with a three-legged stool, the stronger each leg, the more solid and reliable it will be.

In a nutshell …

Acceptable character is basically a detailed analysis of an applicant’s credit report, along with their stability of residence and employment. At the end of the day, here’s a scale, from top-notch to lousy gold plating. The further away from lousy, the stronger the leg of the stool. And this is considered the most important leg by many very experienced lenders (like me, by the way).

An applicant’s ability (proven and historically stable long-term) to make good credit decisions is critical, as it is essential that any new customer have the ability to pay off their debts. The strength of the character’s leg tells us his willingness to take over his duties in an acceptable way. However, this branch of Ability measures your ability, your ability, can you afford it? This leg of the stool needs the support of a probable, reliable and stable future income stream available so that the client has the funds to make the timely payment.

The Guarantee that secures the transaction is the third leg of this three-legged stool. Obviously, the more security the loan collateralizes, the better and stronger the bank will be. However, it is considered by many to be the least important leg of the stool as it can lose value and is not always of satisfactory quality / marketability, or affordable, by default.

With two sturdy legs for our stool, with only a weaker one, although not ideal, it is still a suitable formula for a more conservative loan approval. Two of the weakened legs is generally a recipe for disaster. Having all three fragile legs at the source, barring a miracle, is surely a future loss.

A missing ingredient in the recent training regimen of most employers in our industry is teaching this concept to all staff. Sure, processors can get a small part through osmosis; naturally subscribers and institutional investors should everyone is intimately familiar with this kind of thinking; however, it is our observation that many of them are not. Too often, unfortunately, conventional loan officers don’t have the first idea what it’s all about. They see themselves as sales experts, closers, and sadly not loan analysts as they should be. Yet those same LOs are the face of our industry for almost everyone out of business!

It is time for them and everyone else to understand what a good loan is.