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LOAN ORIGINATION PROCESS EXPLAINED (AND HOW TO IMPROVE EFFICIENCY)

The defi Team Banking, Compliance, defi INSIGHT, Originations

A modern loan origination process provides the key to a successful result

Businesses are always looking to make their operations more efficient, and it’s no different for consumer lenders. Because of its significance early in the lending process, the introduction of technology often starts with loan origination. Processing loans requires lenders to gather considerable information and analyze an applicant’s creditworthiness, all while following specific rules and regulations. Additionally, lenders should view the loan origination process as more than adding to their portfolios but should also be a point when they can create loyal customers.

The prevalence and importance of the data gathered within loan originations lends itself well to the digitization of the process. Technology can significantly improve a lender’s operations, speeding workflows while reducing risk exposure. This added efficiency makes for quicker decisioning, which in turn creates a better consumer experience. While technology can improve any part of a lender’s operations, the loan origination process is where technology can yield the most benefits.

Steps of the Loan Origination Process

From prequalification to the funding of a loan, using technology benefits both lenders and their customers. Modern loan origination systems (LOS) automate the process, which expedites communication and reduces risk. Quick decisioning shows consumers that a lender has efficient processes in place, which will allow them to respond to other issues quickly. At every step, technology improves the confidence and security of all parties involved.

6 Steps of the Loan Origination Process
1) Pre-Qualifying PeriodApplicants submit certain documents with personal information, which is used by the lender to make an informed decision.
2) Applying for a LoanEnabled by digital loan origination, applicants apply for a loan online using a PC or mobile device.
3) Processing the ApplicationA modern LOS automatically applies decision rules to establish an applicant’s creditworthiness.
4) Underwriting ProcessThe underwriting process is critical to lenders, as this is a crucial point at which risk is mitigated.
5) Quality ControlAt the quality control stage, data is evaluated against both the lender’s internal and regulators’ external guardrails.
6) Funding the LoanAt this final stage, a lender’s LOS ensures that everything necessary for compliance has been done.

Step 1: Pre-Qualifying Period

In this initial stage of the loan origination process, applicants provide a list of items used by the lender to make an informed decision.

Prequalification information includes:

  • Banking information, such as type of account
  • Birthplace
  • Current employer
  • Date of birth
  • Email address
  • Present occupation
  • Signature
  • Source of income
  • Legal name, including maiden or middle names when applicable
  • Marital status
  • Permanent residential address
  • Personal identification number contained within official photo document
  • Telephone numbers

Lenders configure the loan origination technology to gather and process data, facilitating better decisioning. Configurability is crucial to any modern LOS, and it allows lenders to adapt to their customers or fluctuating market conditions. Configurable software solutions can contribute to a lender’s portfolio by helping identify those customers close to paying off their loans and presenting these borrowers with special offers.

Step 2: Applying for a Loan

The application process can be one of the most painful steps for applicants and lenders, which is one reason why many lenders have brought applications online. When paper applications proliferated, applications often had missing or incorrect information, whereas the digital application process significantly reduces human and other errors.

Digital loan applications offer a variety of benefits:

  • Aids lenders in adapting to rapidly changing market conditions.
  • Allows applications from anywhere with an internet connection.
  • Captures digital images of any necessary supporting documents, such as photo ID and copies of paper forms.
  • Contributes to efficiency and accuracy by guiding applicants throughout the process, ensuring all required information is provided.
  • Eliminates the need for slower and more costly manual decisioning processes.
  • Enables rapid decisioning, often without underwriter intervention.
  • Expands lender reach to more potential customers, especially for market segments that prefer mobile transactions.
  • Permits lenders to address specific market segments more easily.

Automating this part of the loan origination process also enables lenders to glean insights from applicants’ data so that they can provide better products and services to their customers. Digitizing the application process quickens the pace at which lenders can process applications, allowing them to expand their portfolios without increasing risk. 

Step 3: Processing the Application

At this stage, a lender’s credit department reviews the application for completion and accuracy. Many online applications won’t allow applicants to move forward if certain required fields haven’t been filled out or specific information is missing, which speeds up workflows and helps maximize a lender’s efficiency.

A good LOS will also automatically apply decision rules to establish an applicant’s creditworthiness, resulting in near-instant decisions and consistent compliance. In addition to significantly speeding the loan origination process, an automated LOS can flag specific applications for review. Once flagged, alternative credit data and trended credit data can be applied during the underwriting process.

Step 4: Underwriting Process

At this crucial stage, lenders gauge and mitigate risk by reviewing credit scores and other relevant data using their unique benchmarks. 

A modern LOS system will evaluate what needs to happen next: 

  • Request more information from the borrower.
  • Pull additional information from an internal or external system. 
  • Auto approve, decline, condition, or restructure the loan. 
  • Refer to built-in complex pricing matrices to determine the deal that’s right for the lender and the borrower.

Automating this process allows lenders to make data-driven decisions and record evidence of their compliance should they be audited. Automation doesn’t eliminate the need for underwriters, however. People are still needed to evaluate flagged applications that aren’t automatically approved or declined.

Step 5: Quality Control

This is the last point at which lenders can ensure that the application data adheres to all rules and regulations. In this highly regulated industry, automation proves valuable.  

Technology frees up human resources, which can be reallocated to improve operational scalability. Automation helps make decisioning and risk evaluation less time-consuming while reducing the chance of human errors. 

Though it may seem counterintuitive for an industry reliant on consumers, lenders and their customers benefit from automated technology that applies an unemotional eye to the countless data points gathered. By making the quality control stage as efficient as possible, lenders reduce the time to funding, which is one of the most critical aspects of today’s loan origination process.

Step 6: Funding the Loan

Most consumer loans are funded once all compliance issues have been covered, and technology can also help here. At this final stage in the loan origination process and before an approved loan is disbursed to the customer, a lender’s LOS ensures compliance. 

  1. The data has been collected
  2. The applicant’s creditworthiness has been evaluated
  3. The underwriter has approved the loan

A LOS can track funding at this stage, ensuring that everything is in place for the servicing stage of a loan. By integrating with payment software, once the loan is approved for disbursal, a borrower can schedule automated loan payments. For lenders, what follows a loan’s funding is equally important, as repayment of the loans they approve is where their profits are made.

Getting Started

defi SOLUTIONS is redefining loan origination with software and services that enable lenders to automate, streamline, and deliver on their 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 the loan origination process, contact our team today and learn how our cloud-based loan origination products can transform your business.
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