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 see the loan origination process as more than adding to their portfolios but also a point when they can create loyal customers.
The prevalence and importance of the data gathered within loan originations lends itself well to 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 bring the most benefits.
Steps of the Loan Origination Process
The loan origination process spans from prequalification to the funding of a loan. Origination processes that utilize technology allow efficient delivery of information through the use of digitized documents and online applications. Both lenders and their customers benefit when it becomes easier to make secure payments, check loan status, and change account details while also making lender workflows more efficient.
When it comes to a modern loan origination system (LOS), automating loan origination processes greatly improves decisioning times while reducing risk. When technology is used in auto or other consumer loan origination, processing goes more quickly, often returning decisions in seconds rather than the hours or days they took in the past. This sort of quick decisioning shows consumers that a lender has efficient processes in place, which will allow them to respond to other issues quickly.
In this initial stage of the loan origination process, applicants must submit certain documents with personal information. Prequalification involves the consumer providing a list of items used by the lender to make an informed decision.
Prequalification often requires information that includes:
- Banking information, such as type of account
- Current employer
- Date of birth
- Email address
- Legal name, including maiden or middle names when applicable
- Marital status
- Permanent residential address
- Personal identification number contained within official photo document
- Present occupation
- Source of income
- Telephone numbers
The loan origination process should be flexible enough to allow lenders to configure it to gather and process data that contributes to better decisioning. Configurability is crucial to any modern LOS, as it allows lenders to adapt to their customers or changing market conditions. Configurable software solutions can even contribute to a lender’s portfolio by helping identify those customers close to paying off their loans and presenting these borrowers with special offers.
Applying for a Loan
The application process can be one of the most painful steps for both applicants and lenders. It’s 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 greatly reduces human and other errors. Today’s paperless applications don’t just involve applicants applying online but make it possible from any mobile device, including smartphones and tablets.
Benefits digital loan applications provide include:
- 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 certain market segments more easily.
Digitizing the application process quickens the pace at which lenders can process applications, allowing them to expand their portfolios without increasing risk. 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.
Processing the Application
This is the stage at which a lender’s credit department reviews the application to ensure it’s complete and accurate. Many online applications won’t allow applicants to move forward if certain required fields haven’t been filled out or if specific information is missing. This 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. This results in near-instant decisions for those with excellent credit ratings while also providing consistency in the application of rules to ensure compliance. In addition to significantly speeding the loan origination process, an automated LOS can flag certain applications for review. Once flagged, alternative credit data and trended credit data can be applied during the underwriting process.
After the application has been filled out completely, underwriting begins for the loan. Origination processes at this stage are critical to lenders, as this is a crucial point at which risk is mitigated. Lenders look at traditional credit scores along with other relevant data, with many using their own unique benchmarks. By automating this process, lenders can make decisions that are strictly data-driven while also being able to prove compliance should they be audited.
This links again to configurable software that allows lenders to modify decision rules to meet specialized underwriting guidelines or changing market conditions. A key advantage of an automated underwriting approach is that it ensures risks are gauged accurately and quickly. To accomplish this while also improving portfolio performance and reducing risk, applicant data must be evaluated properly. For this, analytics software is imperative.
Modern lending analytics enables lenders to:
- Configure analytics tools without the need for coding or other technical skills.
- Easily obtain detailed analyses through the selection and filtering of relevant data.
- Observe current trends to proactively detect inefficiencies while mitigating possible risks.
- Understand lending data without the need for analytical experts to evaluate data quality or structure.
Yet this doesn’t eliminate the need for underwriters. Instead, the human element in the underwriting department can be used to evaluate flagged applications that aren’t automatically approved or declined. In fact, using data analytics in the underwriting stage allows lenders to expand their portfolios without increasing risk.
As a highly regulated industry, consumer lending requires that lenders follow all applicable rules and regulations. This is another key area in which automation proves valuable. It’s the last stage in the loan origination process, where lenders can evaluate the data provided by an applicant. It’s at this point where this data is evaluated against both the lender’s internal and regulators’ external guardrails, including through rules and regulations put forth via legislation.
Technology allows lenders to free up human resources that can then be used to improve speed and performance while enabling greater operational scalability. Automation helps make both 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 important aspects of today’s loan origination process.
Funding the Loan
Most consumer loans are funded once all compliance issues have been covered, and technology can help here as well. At this final stage in the loan origination process and before an approved loan is disbursed to the customer, a lender’s LOS ensures that everything necessary for compliance purposes has been done.
- The data has been collected
- The applicant’s creditworthiness has been evaluated
- The underwriter has approved the loan
A LOS at this stage can track funding, 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, with fees and interest calculated into them. For lenders, what follows the funding of a loan is equally as important, as repayment of the loans they approve is where their profits are made.
defi SOLUTIONS offers solutions for a lender’s complete loan or lease lifecycle. Partnering with captives, banks, credit unions, and finance companies, defi’s market-leading solution helps lenders exceed borrower expectations. From digital engagement through the complete lending process, defi sets new standards for flexibility, configurability, and scalability in the origination process while also offering tools for loan servicing. defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information on the loan origination process and how defi can help, please visit www.defisolutions.com.