What is Loan Origination System and How It Can Improve Lending Efficiency?

What is Loan Origination System and How It Can Improve Lending Efficiency?

Loan origination is a process by which a borrower applies for a loan, and a lender disburses it or rejects the application.  

The origination process includes every step from application to funding disbursement, or rejection of the application. The system of automating and managing the loan application and disbursal processes is known as the loan origination system. 

Depending on the types of loans, the origination process differs. For example, the process for mortgage loans is different from that of personal loans. After loan origination, loan servicing takes place. The servicing part includes all the procedures until the borrower repays the loan entirely. 

The loan origination process can vary between different financial organizations. This process may happen through several channels, involving multiple conversation touchpoints, and several meetings with the borrower. 

The loan origination process is usually cumbersome and requires a lot of documentation. Generally, loan origination takes somewhere between 35 to 40 days. However, with the increased use of automated systems, loan origination is becoming easier and faster. 

Stages of loan origination

Loan origination takes place over multiple stages. The initial origination stages are crucial for delivering better customer experiences. The origination process differs from lender to lender. However, some of the critical steps that are similar are as follows.

Pre-qualification

Also known as pre-screening, pre-qualification is the very first stage of loan origination. Here the lender checks the eligibility of the borrower for a particular loan and determines the authenticity of the borrower. The borrower will have to submit identity proof documents to the lender to get the loan. These documents include:

  • ID proof such as a passport or a government-issued ID card.
  • Present employment status, and any certificate showing income status.
  • Credit score
  • Bank statement and previous loan statements if any

Once the borrower submits these documents, the lenders verify them. The lenders may verify these documents manually or have software systems that automate the process to an extent. Once the verification stage is complete, the lender allows the borrower to proceed with the application process.

lending CRM - data gathering

Application

The application process is where the borrower provides relevant information to request a loan. The lender takes all the details from the borrower and proceeds with processing and underwriting the loan. 

Traditionally, the application process involved a lot of paperwork. However, now, organizations are switching to digital applications and self-serve portals. Digital applications not only reduce human error but also makes the application process a lot faster. The borrower can apply for the loan via websites or using a mobile app. Digital application are also product specific. So, depending on what loan the customer wants, the application length will vary. 

Application processing

The lender processes the application after it is submitted. In the case of larger organizations such as banks, it is a time-consuming procedure. Multiple departments review the application, one by one. It is essential to verify and validate the application and check whether it is complete and authentic. The reviewing department will contact the customer if the application requires any correction or if any information is missing. Application processing takes time – often weeks or months.

However, a lot of modern banks and financial organizations are now switching to automated platforms. Automated loan origination systems can process the application in an instant. Often, these systems use alternative data points to assess customer eligibility. It can flag files, return it to borrowers, and notify the relevant department. 

Underwriting

Underwriting is a process by which lenders analyze your financial information. To decide how much funding the lender can allocate, they must consider multiple parameters. Lenders have different scores, such as credit scores, risk scores, outstanding loans, and other parameters. Now, most of this process is automatic. Loan origination systems can take care of calculating these scores.

Verification underwriting process

Credit decision

The result of underwriting is the credit decision. The lender decides if the application will be approved or denied at this stage. Loan origination systems can make this decision automatically. It is easy to assess the different risk factors and scores and conclude quickly using AI-powered software. Modern software systems also use machine learning to analyze these scores and make the credit decision.

Quality check

One of the final stages of loan origination is quality checking. The lending business is highly regulated. Therefore, to ensure compliance, the lending organization must check that the processes are error-free and compliant. The lender validates the internal and external regulations at this stage. The lending organization verifies the application one more time before the funding.

Funding

After all the documents are verified and signed, the lender makes the funds available. Some form of loans requires more steps. These include loans against property or business loans. 

Areas where a loan origination system can help

In the current market, financial organizations are persistently trying to improve their workflow. Efficient systems not only improve customer experience but also brings better ROI. Financial services institutions are focusing more on the automation aspect to improve loan management. Adopting technologies such as microservices, APIs, machine learning, and AI is now quite effortless. The integration of these technologies into legacy loan origination systems will cut down on the processing time and reduce operational costs. To achieve greater efficiency, lenders need to focus on the following tasks.

  • Automate data collection from the customer.
  • Verify the authenticity of documents digitally
  • Automate the underwriting process
  • Enable third-party integrations to the loan origination system
  • Enable automated workflow models. 

Here are some of the areas where automation can help.

Customer (borrower) management

In any decision making, getting correct customer data is the first essential step. For lenders, this can be quite an arduous task. The data collection involves a lot of paperwork with a high chance of inaccurate data getting into the system. Automated loan origination systems can help here with electronic forms.

Loan origination systems have web-based interfaces that the customer can fill in. Often, more advanced platforms will also pre-fill some of the data for the customer, making it easier for them. These platforms also come with APIs that can help integrate them with other apps and services.

Many financial organizations keep multiple copies of data across different departments. With an automated system, it becomes easier to access data and reduce the duplication of documents. The data is stored centrally. Employees with the right privileges can access them from anywhere. From the perspective of audit control, this can be quite helpful.

Borrower profile - Collections CRM for debt recovery - retail banking CRM

Credit analysis

Modern lending CRM software can help lenders understand the customers’ credit history in just a moment. With the appropriate permissions from the customer, the program can extract relevant data from the customers’ financial documents. The program can automatically inspect the documentations and create a spreadsheet. Technologies such as machine learning and optical character recognition help extract the information. These technologies can help the lenders pre-screen a borrower and even provide credit decisions in minutes. 

Credit decision

In the loan approval process, automation helps with mining the data and simplifying the decision process. For many lenders, deciding to fund a loan by collating various documents is a difficult task. Not only does it allow human error to creep in, but it is also a slow process. For new relationships, this can create a negative impact.

Modern lending software can do this in minutes. These programs combine data from multiple stages and help lenders decide based on their predefined rules. To achieve this, lenders need to set a process first. Based on the policies, the program screens the applicants. The final step is to approve or decline the loan. The automated software can flag potential risk factors and help loan officers prepare a proposal.

Portfolio risk management

A strong reason for using automation is improved data integrity and governance. All lenders have a set amount of risk they can tolerate. Organizations have rules based on which they set these risk levels. Without a portfolio reporting tool, coming up with these rules can be tedious and error prone. With manual underwriting, it may be multiple weeks before a problem becomes visible. At that point, it may be too late or too costly to fix the issue. Automation helps a lot in lending risk management. 

Self-serve application forms

Self-serve application forms provide customers with a simple and intuitive way to approach the lenders. For lenders, it is a neat way to reduce junk applications. OTP verification helps in getting authentic customers, improves the customer experience, and saves the lender’s time. 

Self serve loan application - Lending CRM

Workflow automation

Loan origination software can also help in automating workflows. Origination software can define and automate workflow for loan distribution to the in-house teams and call-center agents. The loan origination system software can take care of scheduling customer-agent interactions or meetings. From there, it can take over the application and analysis process. In the next stages, it can help in the underwriting and decision process. Finally, based on the decision, the organization can fund the loan. All these make it an end to end solution for managing the workflow of the loan origination process.

lending CRM - complete loan disbursal lifecycle

Conclusion

Automation is the driving force for all businesses in the modern era. With the onset of the pandemic, the global lending market has exhibited a decline. However, it will start growing within a few years. Organizations need to prepare for the change right now. Lenders should start focusing more on automating the process of origination. 

Globally, more and more organizations are allocating budget for a digital transformation. A loan origination system can drastically improve the workflow and customer experience. By using such solutions, lenders can also reduce debt collection risks. Organizations that adopt these systems today have a higher chance of increasing their profit margins. 

Listen to the evolving landscape of lending and the role of digital transformation.

If you are looking for software that streamlines your loan origination process and seamlessly integrates with your LOS, then you must try out LeadSquared Lending CRM. 


Loan Origination System (LOS) FAQs

What is a LOS system?

A Loan Origination System (LOS) is a software or a set of multiple software built to support the loan application and disbursal processes. It saves time, improves operational efficiencies, and reduces default risks in lending.

Can we integrate CRM with LOS systems?

Yes, you can integrate Lending CRM with LOS systems to automate pre-screening checks. It will save your time, improve funnel quality, and speed up loan disbursal. 

What does origination mean?

Origination is the process of screening the applicants, authenticating them, underwriting the loan, and finally funding the loan.

How can loan origination software help in loan management?

A loan origination software simplifies loan management by automating data collection, verifying documents, automating underwriting and workflows, and enabling third-party integrations. LOS also integrates with CRM systems to maintain the borrower profile and track them until the final repayment.

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