As a lending institution, you must verify income and assess risk before issuing a line of credit or loan to a consumer. When you mitigate your risk, your institution will likely have lower default rates, which means you can afford to lend to more consumers and remain in business long-term. There are several ways to verify identity and assess risk, each with benefits and limitations. Let’s review the most common options so you can both protect the firm’s financial standing and efficiently serve your customers.
Reviewing paystubs is a tried and true method of verifying income. The stubs clearly show how much a consumer earns each pay period. But, while they’re easy to understand, they provide a very limited picture.
The stubs only reveal what was earned during a finite period of time – not over the course of a longer span. They also don’t help with assessing risk. On top of that, you typically have to wait for consumers to provide them, which could drag out the lending process. Plus, you’ll still have to waste time by calling the employer to confirm the information anyway.
Conducting a credit check is the current gold standard for financial risk assessment. Data from these reports indicate whether or not the consumer has used credit responsibly in the past. You can also see how much a consumer has borrowed in relation to their income, which helps determine if they can comfortably take on more debt.
Even though credit history and score are important factors to consider, they alone don’t give you a full financial look at a consumer. Credit reports don’t provide any income information. Plus, the information isn’t standardized or necessarily reliable.
There are three credit bureaus (Equifax, Experian, and Transunion) and multiple credit scoring models (i.e., FICO® Score and VantageScore®). On top of that, lending institutions may report different things to each bureau - or not report data at all. That means the information you acquire may vary based on the source.
Fortunately, factors that impact credit health and score are relatively universal. Consumers with the best scores pay their bills on time and handle a mix of credit accounts (i.e., mortgage, student loan, credit card, etc.) responsibly over a long period of time. These consumers are typically low-risk.
Ordering a report through ChexSystems is another way to gauge risk. The report reveals whether a consumer has had any problems with a checking or savings account. Potential red flags include bounced checks, negative balances, suspected fraud, involuntary account closure, and more.
While the information in the report is useful, it can’t stand alone. Despite demonstrating a potential lack of financial responsibility, it doesn’t provide a consumer’s credit history. You also won’t see any income data.
ModernTax is a new application programming interface (API) designed to make verifying a consumer’s adjusted gross income (AGI) a snap. The system connects directly to the Internal Revenue Service (IRS), retrieves more than 250 pieces of data, and gets you what you need in just three minutes. All data is encrypted, so your consumer’s information is secure.
With ModernTax, you won’t have to wait for your customer to submit their paystubs. Plus, you’ll get a more in-depth look at their financial health beyond what their credit check would provide. The sophisticated API helps you review a consumer’s file faster and more efficiently, so you can render a timely and accurate lending decision.
As a banker, it’s your job to connect consumers with the financial products they need and want. To ensure the firm's longevity, you must take steps to verify the consumer’s income and assess their financial risk before lending them any money. As you can see, you have several tools available to do this. We encourage you to add ModernTax to your verification toolkit.