"Bio-Decisions" or Analytics?

Disclaimer: I have been borrowing money from banks as a consumer for 51 years, and as a business for 38 years. I have also lent (donated) money to friends and family. But I have never lent money professionally. So even though my expertise is in IT rather than lending, I believe many banks could have avoided defaults (in some cases, bank failures) if lenders had relied more on analytics. "Bio-decisions" means relying on a few body organs to make a loan. Analytics means using one body organ (the brain) and technology to make intelligent assessments regarding the legitimacy of a loan request.

Way back (five years ago) when lending was as simple as depositing, I had developed an idea for what I called Lending Based On Legitimacy (LBOL). Simply stated, it was a computer model that even a clerk could use to test the value of a loan application, including quantification of risk factors, and a value score based on achieving prime expectations. I had never heard of subprime five years ago.

When I tested the idea on a focus group consisting of loan officers, I immediately learned that my idea was indeed straightforward and easy to understand. Everyone cut to the chase to give me their impression of its value.

The results of that experiment remind me of what my over-the-fence Irish neighbors used to say when they and my father would get heated up over any government or institutional absurdities: "Saints preserve us." What I heard from bankers was a bit hard to take, but I always tell the truth. Here's what I mean. "I look them straight in the eyes and I can tell if it's a good loan." "Lending is based on seat-of-the-pants judgments." This is when I realized an optometrist and proctologist would have been more appropriate than a computer model if lenders needed help in refining their craft.

There are 80 bank tech vendors in Automation in Banking-2011, displaying 480 banking solutions. Only four solutions come close to delivering specific analytics-based support geared to lending. Forty-nine business intelligence and risk management solutions offer the makings of design-your-own lending analytics solutions. Given the scarcity of tech-based tools to secure more reliable loan portfolios, I don't believe a set-aside of 1% of a bank's loan portfolio will be enough to cover Reserve For Loan Losses -- never was, never will be. Sorry Congress, but you missed that one in your banking reform plan.