A Competition Commission order
for ‘Home credit’ providers is an example of improving the
available information within the subprime sector, which ought to
pay dividends in future.

The idea behind it is to share the
information on customers gathered by door-to-door lenders, who loan
out small amounts at a time, in the same way as other lenders share
information via the credit bureaux. When people within this
demographic apply for a larger loan, the lender can see how they
behaved previously, which finance companies were previously unable
to do, as no data were available. This initiative should therefore
help the health of the sector in the long term. It will also help
these customers improve their personal credit rating.

It is thought that there are around 8
million people in the UK who fall into the non-standard or subprime
category. Because of the additional data available, lenders looking
cautiously at returning to this market are keen to make their
decisioning more sophisticated, using credit scoring and
analytically-driven lending rules to give them more control over
underwriting decisions.

Banks have been using these types of
sophisticated tools for a long time, but these are now being
adopted more widely in the non-standard market – even by smaller
players, who are finding them a cost-effective way of boosting
operational efficiency and portfolio control.

There will always be a role for manual
underwriting in non-standard finance, as further investigation is
often required.

However, the introduction of credit
scoring techniques allows consistent credit decisions to be made
and reduces the ‘grey area’ between acceptance and refusal.

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