What is an Automated Underwriting System?

Too many lenders have failed consumers by not meeting expectations for simplified processes and personalized customer service.

Inefficiencies in the lending systems — straddled with manual error-prone workflows, paper-based loan approval procedures, poor data quality, and slower decision times — have complicated the entire process.

One of the areas where breakdowns happen is during the underwriting process.

Fortunately, 81% of lenders are implementing automated underwriting systems in their loan procedures to speed up application processing, reap significant time and cost savings, and improve the customer experience.

This guide covers how an automated underwriting system works, its benefits, and how you can implement one in your organization.

What is an automated underwriting system?

An automated underwriting system (AUS) is an advanced computer program that quickly assesses loan applications based on borrower-provided information to determine loan pre-approval. This technology-driven approach speeds up the underwriting process, making it a pivotal advancement in the lending industry.

Unlike a human underwriter who sifts through piles of paperwork and data (which can take days or weeks) an AUS can analyze each application based on a lender’s underwriting criteria, then accurately decides within minutes whether to approve or not.

The AUS evaluates information the borrower provides plus public information about them, assessing their:

• Creditworthiness or eligibility for the loan
• Capacity to make payments
• Collateral or assets on hand

Based on this evaluation, the AUS will give each application a score based on the borrower’s risk level, helping lenders make timely loan decisions.

How does an automated underwriting system work?

An automated underwriting system is designed to automate the credit risk evaluation process for loans to speed up approval for borrowers. The system uses built-in rules and a scorecard to automatically approve or deny potential borrowers’ loans for underwriting.

Specifically, an AUS judges each application based on:

• Income
• Debt-to-income ratio
• Employment history
• Credit history or credit score
• Public records (including citizenship/legal status)
• Cash reserves and liquid assets

Once the loan officer receives a borrower’s application, they’ll enter the details provided into the AUS, and additional information on the applicant from credit reporting agencies.

The AUS weighs the information to determine the borrower’s likelihood of repaying the loan based on their credit history and past behavior or performance. This loan risk assessment process is based on a comprehensive analysis of the borrower’s application and applies uniform standards of creditworthiness in line with the lender’s procedures.

An AUS uses a scientific scoring method of measuring the relative amount of risk that gives all borrowers the same objective treatment. This helps lenders:

• Save time
• Enforce uniform standards
• Reduce discrimination
• Improve the overall quality of loans sold
• Generate more business
• Efficiently complete credit risk assessments
• Lower manual underwriting costs associated with quality control

The exception is when a borrower has an unusual situation that makes automated underwriting difficult, in which case lenders use manual underwriters.

How an automated underwriting system scores loan applications

When a potential borrower applies for a loan, the loan officer will run the application through the AUS. The system reviews the details on the application and probably pulls additional information, such as the applicant’s credit report.

After the AUS review, a human underwriter will also review the application to guide their approval decision-making or rubber stamp the system’s decision. Occasionally though, no human underwriter will review the application, meaning the AUS’s decision is final.

Based on the applicant’s assessed risk and underwriting potential, the AUS will render five types of recommendations:

• Accept/Eligible: The borrower’s credit risk is “acceptable” and meets all regulatory requirements and the lender’s criteria to qualify for the loan. It doesn’t mean the loan is approved but the application moves to the next step in the process where additional paperwork like reserves, rent verification, and more may be required.
• Refer/Refer with caution: The AUS has flagged some issues or multiple risk layers, which require a human underwriter to further review the loan file or proceed.
• Ineligible: The loan file has not met one or more requirements to qualify for the loan and the applicant won’t move forward.
• Unable to determine: There are other issues with the application and the AUS can’t make official recommendations until the errors are resolved.

AUS recommendations are only as good as the information fed into the system, so its findings aren’t final. An experienced loan officer can tweak a borrower’s application to get approval depending on the situation at hand.

For example, if the AUS rendered an ineligible finding, the loan officer can analyze the situation and tweak the down payment amount, add reserves, or switch from Freddie Mac LP AUS to Fannie Mae DU AUS (and vice versa).

What are the benefits of an automated underwriting system?

An AUS benefits both the lenders that deploy it and potential borrowers. Let’s take a closer look at some of the key benefits of implementing automated underwriting solutions in your financial institution.

• It reduces paperwork and waiting time: Underwriting is time-consuming, sometimes taking days or weeks to complete. An AUS cuts down the time taken to underwrite loan applicants’ paperwork like W-2 forms, pay stubs, and more. Once the platform has all the correct information, it delivers speedy and efficient underwriting recommendations based on the lender’s criteria.
• It eliminates human errors: Loan officer duties are broad, and can take a toll on their ability to review and analyze applications thoroughly. This leads to mistakes during manual input or data entry—regardless of the numerous checks they conduct. AUSs approve applications using preset rules and algorithms, making them virtually error-proof. They extract and process data quickly and efficiently, instantly verifying a borrower’s information against employer databases, and reducing the delays caused by chasing missing supporting documents.
• It cuts down on fraud: Fraud detection is a huge risk and challenge in manual loan underwriting and processing. A Mortgage Fraud report found that 0.76% (1 in 131) of loan applications in Q2 of 2022 contained fraud. Lenders turn to automated underwriting, which reviews customer data using different financial measurements to identify and flag inconsistencies and reduce fraud. Plus, it eliminates the fear of missing relevant data or transposition errors that may impact the decision-making process.
• It delivers accurate and quality data for decision-making: Human underwriters are prone to making clerical mistakes that may affect the entire process. An automated system captures information accurately, flagging any inconsistencies, and rendering recommendations based on the borrower’s data and lender’s criteria. This helps lenders make the right decisions, quickly.
• It lowers operation costs: An AUS speeds up the underwriting process, allowing lenders to evaluate and process more loans faster and reduce operating costs.
• It improves a lender’s performance: An AUS helps you generate more loans while boosting profitability. And by reducing the processing time, you can improve the customer service experience and gain a competitive edge in your industry.
• It increases employee productivity: With an AUS in place, employees have more time to focus on strategic value-adding work—not repetitive, mundane tasks.
• It improves compliance with regulatory requirements: Automated underwriting systems ensure every rule is implemented based on the filters you set. This ensures your organization meets the lending regulatory requirements and is more compliant. 
• It powers easier and stress-free auditing: An AUS eases out the documenting and lending processes while facilitating accuracy and keeping fraud in check.

Get the most out of an automated underwriting system

Automated underwriting systems are poised to sweep through lending institutions. Implementing an AUS in your lending organization can speed up your loan decision-making processes and immediately greenlight eligible applicants.

Not sure how to get started? Let Inscribe help.

Our AI-powered fraud detection software streamlines the most tedious parts of your underwriting workflows, saving you time and money without increasing risk exposure.

Get in touch with an expert to find out how Inscribe can help you automate your loan origination and underwriting process to make it fast and efficient.