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How AI is Changing Loan Underwriting for Credit Unions

Picture of Jamie Lovell, COO
Introduction
 
Traditional loan underwriting is slow, manual, and prone to inconsistencies. With increasing regulatory scrutiny and the demand for faster loan approvals, credit unions need a smarter way to assess risk and make lending decisions.
 
The solution? AI-powered underwriting.
 
AI is revolutionizing credit union lending by:
✅ Reducing manual review time through real-time risk analysis
✅ Improving accuracy with machine learning-driven credit scoring
✅ Minimizing default risk by identifying hidden patterns in borrower data
✅ Enhancing compliance with AI-driven fraud detection
 
In this article, we’ll break down how AI underwriting works, compare solutions, and outline steps for implementation.
 
 
The Problem: Legacy Underwriting is Too Slow & Costly
 
Traditional underwriting relies on manual data entry, outdated credit scoring models, and human bias. These inefficiencies lead to:
⏳ Longer turnaround times (often 3–5 days for approvals)
💰 High operational costs from manual processing
❌ Inconsistent risk assessments based on subjective factors
⚠️ Increased fraud risk due to lack of real-time monitoring
 
 
The Solution: AI-Powered Underwriting
 
AI underwriting leverages machine learning, natural language processing (NLP), and alternative data sources to assess creditworthiness instantly.
 
How It Works
 
1️⃣ Automated Data Collection: AI extracts financial data from applications, tax returns, and banking transactions.
2️⃣ Real-Time Risk Scoring: Machine learning models analyze borrower history, spending patterns, and predictive signals.
3️⃣ AI-Driven Decisioning: Loans are automatically approved, denied, or escalated for manual review.
4️⃣ Continuous Learning: AI models improve over time, refining credit scoring accuracy.
 
💡 Result: Approvals in minutes instead of days!
 
 
What are the different solutions available in the market today?
 
Loan Origination Systems
Some loan origination systems have rule based underwriting engines baked in. These engines are often limited to helping remove the top "A" paper and bottom "D/E" paper loans and remove those with high DTI/LTV ratios.
 
AI/ML Driven Underwriting Solutions
AI/ML driven solutions provide compliant pre-designed models for implementation that align with regulations. They include bias mitigation and employ alternative data sources. Often, AI/ML underwriting solutions also "learn" over time from previous exceptions or decisions made outside the model.
 
Workflow Automation
Workflow automation solutions can make underwriting easier by "pre-processing" and pre-collecting all the required documentation. Although workflow automation doesnt affect decisioning directly, feeding accurate data into the underwriting models from income and asset documentation improves member outcomes by accurately approving loan applications.
 
How Credit Unions Can Implement AI Underwriting
 
🔹 Step 1: Assess Current Underwriting Bottlenecks
• Identify delays in manual loan decisioning
• Analyze approval vs. decline rates
 
🔹 Step 2: Select an AI Underwriting Partner
• Look for solutions with strong LOS integration
• Prioritize AI models that improve over time
 
🔹 Step 3: Test with a Pilot Program
• Implement AI underwriting for one loan product (e.g., auto loans)
• Compare AI vs. traditional underwriting efficiency
 
🔹 Step 4: Automate & Scale AI Decisioning
• Expand AI underwriting across all loan types
• Monitor AI-driven approvals vs. human-reviewed cases
 
 
What Success Metrics are important to consider in rolling out AI in loan underwriting and processing? Time to loan approval, time to close and time to fund are all good measurements of effectiveness for the program. Also consider measuring Auto decisioning rates by tier and % of automated decisions overridden by a loan underwriter.
 
 
Final Thoughts: The Future of AI Underwriting in Credit Unions
 
AI-driven underwriting isn’t just an innovation—it’s a necessity. By 2026, over 70% of community financial institutions will use AI-powered risk models.
 
🔹 Credit unions that adopt AI today will reduce risk, cut costs, and enhance the lending experience. Ready to automate underwriting? Shastic’s AI solutions can help you get there.