How to Choose the Best Loan Origination System Vendors

Finding a loan origination system vendor can be challenging

If you haven’t evaluated loan origination system (LOS) vendors in more than five years, you’ll find significant changes have taken place. The market is growing rapidly. According to Allied Market Research, the global loan origination software industry is forecast to reach $12.2 billion by 2032, growing at a compound annual growth rate of 10.2% from 2023 to 2032. The report identifies several factors fueling this growth, including the widespread adoption of artificial intelligence, machine learning, and blockchain technologies, improved customer experience, and advances in LOS technology.

To remain competitive, you need a modern LOS that benefits both the lender and the borrower. Here are some criteria for selecting the best loan origination system vendor for your needs.


Loan Origination System Vendor Selection Criteria


We understand the significance of selecting a LOS vendor. That single, critical decision will affect your lending business for years. We also understand how time-consuming the evaluation can be. The guidance we offer regarding LOS vendor selection criteria is based on the following:

  • Decades of expertise in the auto lending industry;
  • Experience working with partners on complementary lending functionality;
  • Research and investments in new and proven technologies to make auto lending more efficient and cost-effective; and
  • A customer community that continually provides guidance and feedback regarding business needs and software functionality.

We’ve identified four high-level comparison criteria to guide your evaluation process—focus, platform, capabilities, and implementation. We are confident these criteria will guide you in selecting a loan origination system that improves your loan origination efficiency, lowers processing costs, and helps you comply with changing regulations.


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1) Focus


When you need a major home or car repair, you look for someone with recognized experience. You could take your Toyota to the local garage, but you’ll feel more confident bringing it to a shop that specializes in Toyotas. Same for plumbing, electrical, or roofing.

That practice holds for selecting a loan origination software vendor. There are software vendors who offer products for almost every business function, but it’s improbable that each of those products is a market leader. Look for a vendor exclusively focused on the lending industry.

Ask these questions:

  • Is loan origination software a primary focus?
  • What’s the history of your loan origination solution?
  • Do your employees—executives, developers, customer support—have experience in the lending industry?
  • Do you have a user community and a means for users to ask questions and share information? Do you hold an annual user conference?
  • Can you provide credible references for lenders who have similar lending practices?

2) Platform


Hundreds of thousands of companies worldwide recognize the financial and organizational benefits of moving to the cloud. A cloud-based loan origination system gives you these advantages:

  • Quick implementation that brings improved productivity to your employees’ desktops;
  • Lower startup and operational costs. You no longer require on-premise IT costs;
  • Ease of scalability as your business grows, application volumes increase, or you expand to new regions;
  • System availability of 99.99% or better;
  • Frequent software fixes and feature updates. Quickly update your system without using up your IT team’s time; and
  • Integration with other complementary cloud-based products to improve process efficiency, decision quality, and portfolio performance.

3) Capabilities


So, once you’ve vetted vendors and narrowed the field down to those with cloud-based platforms, it’s time to find an LOS with the right mix of capability and functionality for your needs. That means finding the right combination of configurability, user interface and experience, decision rules, automation, data and services integration, digital documents, and analytics. Get that balance right, and you’ll process more loan applications using existing personnel, lower processing costs, make better quality lending decisions, and comply with regulatory requirements.

Configurability

Configurability lets you modify the system easily to meet your specific loan processing requirements. It’s one of the most powerful capabilities to look for in a loan origination system. Unlike legacy systems that require costly and time-consuming programming to make changes, an easily configured LOS lets business analysts and administrators make those changes themselves. You should be able to easily change user interfaces, data fields, menus, decision rules, workflows, queues, and reports. That type of flexibility helps achieve greater efficiency in all aspects of the loan origination process. You’ll make the system fit your needs, not the other way around.  

Look for the ability to:

  • Modify the system without the need for technical programming skills.
  • Authorize which configuration changes can be made by individual users.
  • Compare before and after configuration changes before implementing them in a production system. This provides an added level of verification and assurance.
  • Automatically keep a record of configuration changes. This is good change management practice and very useful in the event of a compliance audit.

User Interface, Menus, and Dashboards

Data and process flows for underwriting and verification are unique to each lender. Flexible configuration capabilities let you customize the desktop and format information displayed in menus and dashboards to improve underwriting and funding efficiency.

Look for the ability to:

  • Determine data fields, format, and location on the user dashboard.
  • Select the items displayed in drop-down menus based on user role or access rights.
  • Create custom data fields and formulas unique to your lending practice needs.
  • Automatically change the format and layout of the information displayed based on the loan type, e.g., auto, marine, recreation vehicle, solar, personal, commercial, etc.

Decision Rules

Decision rules are powerful. They replace inefficient, time-consuming manual decisions, allowing underwriting and funding staff to focus on more complex, higher-value decisions that require lending expertise. Rules are vital in automating lending processes. Rules can be used to establish consistent credit policies, determine whether data values such as LTV, term, PTI, or vehicle age are within policy, and automatically alert when they exceed limits.  

Rules also support compliance requirements. Decision rules can be set up to verify applicant attributes or ensure that regulations have been followed. 

Look for the ability to:

  • Allow business analysts to define, implement, and modify decision rules;
  • Apply decision rules across all areas of your lending process;
  • Auto-approve or conditionally approve applications based on defined credit policies;
  • Auto-structure a deal that might typically have been declined;
  • Implement fully automated, manual, or mixed lending decisioning processes;
  • Use cascading formulas to facilitate complex decisioning processes; and
  • Automatically maintain a history of decision rules to demonstrate compliance.

Automation

You can’t be competitive without an automated loan origination process. Automation, underpinned by decision rules and workflow, eliminates manual processes, accelerates loan decisioning, reduces processing costs, and allows you to efficiently and accurately process more applications with existing resources.

Automation allows lenders to develop various deal structures based on the original loan approval. With multiple offers to choose from, dealers have greater flexibility in building custom deals within a lender’s policy and better match a customer’s lending profile.

Look for functionality that provides:

  • Out-of-the-box underwriting and funding workflows that you can easily configure to meet specific processing needs;
  • Auto decline workflows to eliminate unqualified applications and respond with adverse action notifications (and audit trail);
  • Auto-structuring capability with credit policies tied to rules or formulas that return decisions in seconds;
  • Automated calls to credit bureaus and alternative credit data services that return data in a normalized format useful for rules-based, mixed, or manual decisioning; and
  • Ability to track and analyze automated processes for continual process improvement.

Data and Services Integration

A wealth of detailed applicant information is available to lenders through credit bureau data, alternative credit data, and valuation services. This information helps lenders make better-quality decisions and comply with ever-changing regulations. However, integration with these services can be a significant stumbling block. Variations in data fields and formats returned by different credit services can hinder effective data use.  

Look for data and service integration capabilities that:

  • Are already pre-integrated, allowing you to easily configure the data you want to access;
  • Normalize variations in credit data fields and formats to make the information accessible in decision rules and calculations and provide a consistent format throughout the loan origination process;   
  • Allow you to aggregate a large number of attributes such as FICO score, income, homeowner/renter, dealership, down payment, collateral, etc., to create a more accurate assessment of applicant creditworthiness;  
  • Give you access to hundreds of credit attributes that can be used to improve loan scoring, particularly in subprime categories; and
  • Provide automatic calls to services to verify applicant information and process applications following regulations such as Regulation Z, the Equal Credit Opportunity Act, and usury rules.

Digital Documents

Paper loan applications are pretty inefficient. Transforming paper documents into digital documents accelerates the loan origination process and reduces costs. Digital documents eliminate the cost and time of copying and sending documents, lost or incomplete paperwork, and expenses associated with physical document storage. Digital documents can replace paper correspondence and notifications using automated email and text with attached or linked PDFs.   

Look for digital document capabilities that:

  • Manage both application submissions and outbound correspondence;
  • Provide multiple channels of digital communications—scanned image, email, text, and PDF; and
  • Have the ability to securely retain digital documents as business records in support of compliance requirements.

Analytics

Any process-intensive industry can benefit from analytics. Lenders gain two distinct benefits when analytics are applied to loan origination processes and borrower-attribute data captured throughout the loan lifecycle.

First, analytics can tell you how well current loan origination processes are performing, yielding answers to questions like: Where are the time-consuming manual process steps that could benefit from automation? Which underwriters make the best decisions regarding subprime applications? What is the average time spent on loan evaluation by individual underwriters? How many applications from a specific dealer exceeded target decision time?

Second, analytics can identify borrower characteristics and loan structures that positively or negatively affect portfolio performance. You’ll be able to answer questions like: Which attributes of subprime borrowers are highly correlated with 90+ days past due delinquencies? What LTV rates help reduce defaults for used vehicles over five years old? What was the impact of extending terms to 80 months compared to 72 months? Are there market segments we could profitably serve if we had more detailed applicant data?

Look for analytic capabilities that:

  • Do not require technical expertise (SQL programmers), but allow business analysts to explore the data and create reports.
  • Allow the creation of custom calculations to monitor performance metrics.
  • Provide high-level (executive) and detailed (drill-down to an individual loan) analysis.
  • Provide easily consumed analysis via visualization: maps, charts, and graphs.
  • Automatically display report data based on the user profile, e.g., regional performance for district managers, branch performance for local managers, and personal performance for individual underwriters.

4) Implementation


To take advantage of the benefits that a modern loan origination system offers, implementation should not be a protracted, time-consuming, and costly process. The time-to-value for a modern loan origination system should be weeks, not months.

Quick implementation is facilitated by:

  • Cloud-based loan origination system.
  • Dedicated team of specialists exclusively devoted to the success of your system implementation.
  • Capabilities to quickly configure out-of-the-box functionality to meet the exact needs of your lending practices, policies, and processes.

Other Factors

Community

An experienced, successful loan origination system vendor does not develop products in isolation. Regular, ongoing engagement with its community of customers is vital to the mutual success of vendors and customers. With customer interaction, the vendor gains valuable insight into actual product usage, potential enhancements, and overall product direction based on customer consensus. Customers benefit from information shared among the customer community, including problems and best practices.

  • Dedicated client executive backed by a team of technical account experts.
  • Knowledgebase of articles and release notes.
  • Step-by-step how-to videos.
  • Online support case management.

Venture Capital Investment

Confirmation of a vendor’s current and future success is the length of time in the business, the number of customers and business partners, and investments by venture capital firms. In a highly selective venture capital (VC) market, a significant investment by a venture capital firm is a solid endorsement of the vendor’s strategy and prospect for above-average market growth. VC investment should give any lender added confidence.


Pros and Cons of Selecting LOS Vendors Based on Market Share


Lenders looking for an LOS often start by checking loan origination system market share. That can reveal industry leaders and niche players. You’ll get a high-level overview of software functionality and capabilities, and you might get some insight into each vendor’s market strategy and focus. It’s not a bad approach; it does have some pros and cons.

The Pros

In almost every industry, there are established market leaders. They may have been industry pioneers, building their businesses on the strength of early market entry. They may offer several different loan origination products or integrate products for a best-of-breed solution. Mid-tier vendors focus on small-to-mid-size lender needs. Late-entry, promising players may also be included in the ranking because of a unique market focus or innovative technology.

That said, market leaders have:

  • A large number of customers;
  • Financial strength; and
  • Well-established support services.

Choosing an established market leader can lessen the risk of your software investment.

The Cons

Although loan origination system market share helps identify key players, it may not provide the complete market picture nor reflect recent fintech innovations. Consider these factors when evaluating potential vendors:

  • A market share report rarely includes all the relevant vendors. Some may have been overlooked. Others have a policy of not disclosing revenue. Promising startups may have declined the opportunity to participate because of their comparatively modest revenue.
  • Loan origination systems of established market share leaders may be based on outdated technology, a combination of software products acquired and poorly integrated, or cash cow products that have no roadmap for improvements.
  • Fintech innovators deliver functionality such as fraud analytics, credit policies based on machine learning, and vehicle valuation services that can be easily integrated with cloud-based loan origination systems. Legacy LOS may be unable to accommodate the latest services needed to compete in today’s market.

You can begin your evaluation based on loan origination system market share. Still, we recommend you expand your search to consider additional vendors and survey the latest fintech advancements that are improving lending efficiency and decision quality.

Getting Started

defi SOLUTIONS is redefining loan origination with software solutions and services that enable lenders to automate, streamline, and deliver on their complete end-to-end lending lifecycle. Borrowers want a quick turnaround on their loan applications, and lenders want quick decisions that satisfy borrowers and hold up under scrutiny. With defi ORIGINATIONS, lenders can increase revenue and productivity through automation, configuration, and integrations and incorporate data and services that meet unique needs. For more information on choosing the best loan origination system vendor, contact our team today and learn how our cloud-based loan origination products can transform your business.

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