Lenders reveal their secret sauce to Credit Karma


Some of the largest lenders in the U.S. are now sharing their loan-approval process with consumer finance app Credit Karma.

This unprecedented move comes as lenders struggle amid high competition, rising interest rates and fewer borrowers.

By sharing their secret, lenders hope to increase revenue sources by bringing in new borrowers that are more confident in their ability to be approved for a loan, according to an article by Peter Rudegeair and AnnaMaria Andriotis for The Wall Street Journal.

Credit Karma explained that this revelation will allow it to tell its users with near certainty which loans they will be approved for without them having to apply and receive a possible hit to their credit.

From the article:

With more than 80 million members across the U.S. and Canada, Credit Karma has relationships with many potential consumers that banks covet. It also has access to financial data about prospective customers that banks lack. For instance, a tax-preparation service Credit Karma launched two years ago has let the company see tax filers’ incomes.

While currently lenders are only sharing their process for approval of personal loans or credit cards, larger loans such as auto or mortgage could be the next step.

For these loans, much more goes into the process, such as the condition of the home, the location or the appraised value, which cannot be determined by looking at the credit file for an individual. However, by revealing their process to Credit Karma, lenders could increase homeownership through showing consumers if they could receive pre-approval.

Currently the cost to originate a mortgage is steep, and even hit an all new high in the first quarter this year. Lenders even reported a loss of $118 per loan originated, only the second time ever that lenders reported a quarterly loss.

The Mortgage Bankers Association outlined these struggles at its Mortgage Secondary conference in New York City earlier this year, saying it was due in part to rising interest rates and high competition.

Even some of the largest lenders are struggling as layoffs are seen in mortgage departments throughout the industry. For example, in October, JPMorgan Chase laid off nearly 400 employees in its consumer mortgage banking division. Wells Fargo laid off about 650 mortgage-related employees in August citing the low-volumes.

As of yet, lenders have not found a solution for the harsh lending environment. Back in June, MBA Chief Economist Mike Fratantoni suggested some lenders could start looking to seasonal hiring, but said right now there is no real solution.

Perhaps this could be one route lenders take to increase their clients and increase the number of applicants who are likely to be approved for a mortgage.

Credit Karma did not say which lenders had revealed its process, but said it included two of the five largest. The Wall Street Journal article points out that American Express, Bank of America, Capital One Financial, Citigroup and JPMorgan Chase are the top five U.S. credit-card issuers, according to the Nilson Report.

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