If you’ve always wondered what a loan origination system is, how it is different from a loan management system and the value it offers to lending institutions, this is going to be just the read you need!
What is loan origination?
Loan origination involves the process of a borrower applying for a loan and a lender either disbursing it or rejecting the application. A loan origination system facilitates this process by handling documentation from application to disbursal, ensuring compliance and security with customer data. It also helps lenders manage higher application volumes by minimizing manual errors.
The loan origination process varies depending on the type of loan and financial institution. It may involve multiple channels and touchpoints with the borrower, along with various meetings. Despite its typically cumbersome nature requiring extensive documentation, automated systems are making loan origination faster and easier.
What does a loan origination system do?
In today’s financial landscape, institutions are striving to enhance workflow efficiency to improve customer experience and achieve better returns on investment. Automation plays a significant role in loan management, with technologies like microservices, APIs, machine learning, and AI being readily adopted. Integrating these technologies into legacy loan origination systems reduces processing time and operational costs. To optimize efficiency, lenders should focus on tasks such as automating data collection, verifying document authenticity digitally, automating underwriting, enabling third-party integrations, and implementing automated workflow models.
What’s the typical software stack like in lending institutions?
While the technology stack may vary among lending institutions based on factors like size, offered loan products, and digitalization level, a general overview includes:
Layer 1: Lead management system/ CRM
This system manages customer-facing processes like acquisition, engagement, lead distribution, and marketing campaigns to qualify leads for further processing.
Layer 2: Loan Origination System
Responsible for borrower onboarding, underwriting, and loan disbursal, handling processes such as DDE, KYC OCR verification, eligibility checks, credit appraisal, and offer collection.
Layer 3: Loan Management System
Manages the loan lifecycle post-disbursal, including loan booking, servicing, repayment accounting, and closure, providing lenders with repayment monitoring and borrower reports.
Layer 4: Collections System
Handles delinquency or asset loss cases, with provisions for pre-delinquency identification to mitigate future risks and avoid bad debt.
Layer 5: Integrations Ecosystem
Enables seamless integration with external applications and systems to enhance overall functionality and efficiency.
Application Process:
Traditionally paper-based, now shifting towards digital applications and self-serve portals for faster, error-free processing. Digital applications vary based on the loan type, reducing application time and required fields for borrowers.
Application Processing:
Involves verification and validation of submitted applications, traditionally a time-consuming manual process but increasingly automated for instant processing and alternative data assessment.
Underwriting:
Analyzes borrower financial information to determine funding allocation, with loan origination systems facilitating calculation of credit and risk scores.
Benefits of a loan origination system:
Addresses challenges of manual handling with reduced compliance risk, improved credit risk assessment, frictionless customer experience, enhanced internal collaboration, and streamlined documentation.
Finding the right loan origination system
Borrowers today want loans approved in just a few clicks. Clearly, legacy loan origination systems can impact customer experience with manual data entry and longer turnaround times. So how should you go about finding a loan origination system that’s ‘right’ for you?
Here are a few points to help get you started!
Customer onboarding
Lenders today must be able to onboard customers across channels like a website, on call, or through SMS. Especially when we’re in a mobile-first economy. A LOS in this context must have the ability to ensure frictionless customer onboarding. This could be something as simple as enabling e-signatures, or OTP-based KYC processes, etc. This not only makes it easier for the borrower, but also simplifies the lending experience for front-end and back-end teams.
Process automation
Routine tasks have the scope to be automated. This allows lenders the opportunity to scale as the volume of loan applications increases. With paperless documentation, and automated screening, loan officers have the time to truly engage with borrowers and assist them along their borrower journey.
UI/UX
The loan origination platform you pick would be ideal if it’s low-code/no-code to help staff seamlessly adapt and reduce IT intervention for every minor roadblock. This will also enable quicker implementation.
Configurability
The loan origination system you pick should be easily configurable. This means, you should be able to configure it based on your unique business requirements instead of being a system that’s rigid with a one-size-fits-all approach.
Security and compliance
With the introduction of digitized processes comes the worry of data protection and security.
It’s paramount for lenders to choose a loan origination system that operates with robust security measures and guarantees the safety of sensitive financial data. SaaS providers like LeadSquared ensure enterprise-wide security and compliance.
Integration capabilities
Businesses are hardly monolithic anymore. There is increased collaboration with third-party service providers to enable quicker processes with better functionality. Loan origination software must have the ability to support a range of API integrations.
