non traditional underwriting approaches tim hatfield lfa summit 11/15/2014
TRANSCRIPT
Non Traditional Underwriting Approaches
Tim HatfieldLFA Summit11/15/2014
Traditional UW
• Bank statements• Credit Reports• Taxes• Application• Collateral• Character
Appropriate Risk Yes
NO
Alternative UW
• Bank statements + Log(s) and interviews
• Credit Reports Little to nothing• Taxes Not filed or not accurate• Application• Collateral • Character AND context • Alternative data sources
Maybe
What is in a credit report?
• Personal Credit– FICO/ Vantage Scores– Public Records
• Lacks personal context– Not a perfect proxy for character
• Business Credit
Application
• Let the client guide• Rough idea of sales• Checks and a baseline• Contact information
Collateral
• Leverage to talk• Mission confusion• Cost vs. Benefit• Loan Term
Alternatives:
Traditional:
Why documents aren’t always correct
• Limit tax liability• Difficult process to follow• Cash based businesses• Family nature of finances • Different cultural views on money
(ROSCAs) • Remittances
Piecing together a cash flow
• Relationship and rapport– Fine line between information and advice
• Listening and reconciling • Logs• Receipts• Margins• Alternative Data• Context
Questions ?
Determining Affordability
• How to find the right size of a loan • Standard Products• Ladder style
Case - Guessing Educated-ly
• Maria and Jose have a taco cart• They sell on the corner of campus for lunch
5 days a week and Thursday, Friday, and Saturday nights
• Maria also runs a daycare during the day• 1 bank account for the couple• They asked for $10K for working capital to
grow
HOW MUCH CAN THEY AFFORD?
Potential Sources
• Bank Account• Square statements• Application• Bottom up approach– Receipts and questions– Site Visit
• Contextual Margins• Yelp, Facebook, Twitter
Example
• $2 per taco cost• Number of customers–% paying with card?– Yelp reviews– Count and average (day and night)– Order Number– Number of tortillas used
• Total Sales
Take Home
• Total Sales• Logs? Application stated number?• Approximate shopping for business• Fixed costs- propane, commissary,
labor• 10% net for restaurants• Debts• Sales Tax?
Additional HH Considerations• Additional income– Bottom up from kids and per week
• Other family members• Remittances in both directions• ROSCAs
Total HH Capacity
• Debts- formal and informal• DSCR vs. DTI
Business Income + Personal IncomePersonal Debt Payments + Business Debt Payments + Proposed Payment
Decisioning
• Cash Flow:– Yearly DSCR- >1, >1.25 is bank standard
• Character: Qualitative • Collateral: Most likely no• Credit: FICO, adjusted• Just enough to fail?• Match timing
Questions ?