At its core, the loan origination process may seem straightforward: a borrower applies for a loan, the application is reviewed, and a decision is made. However, the reality is far more complex.
The average loan origination costs have increased by 35% in the past three years, or $3,000 per loan, according to The Federal Home Loan Mortgage Corp.
Loan Origination Workflows: A Detailed Breakdown
Loan origination workflows are not one-size-fits-all; they differ widely based on the loan type, lender requirements, regulatory demands, and borrower profiles. Understanding these variations is crucial for optimizing efficiency and ensuring compliance.
Here are the key stages typically involved in loan origination:
1. Application Intake
This initial stage involves capturing detailed borrower information, which can be done online, in person, or through a combination of channels. The intake process must be thorough, collecting essential data such as personal identification, financial history, and loan purpose.
This information forms the foundation for all subsequent stages, making accuracy and completeness vital. Advanced platforms often use digital forms and integrations with CRM systems to streamline this process, reducing manual entry and errors.
2. Credit Evaluation
Once the application is submitted, the borrower’s creditworthiness is assessed by pulling credit reports from agencies like TransUnion, Equifax, or Experian. This step is critical as it determines the borrower’s ability to repay the loan.
The evaluation often includes a review of credit scores, debt-to-income ratios, and past credit behavior. Modern LOS platforms may incorporate automated tools that not only retrieve credit reports but also provide an initial risk assessment based on pre-set criteria.
3. KYC (Know Your Customer)
To comply with regulatory requirements, lenders must verify the identity of the borrower. Tools like Alloy or LexisNexis are commonly used to perform this function. KYC involves checking government-issued IDs, cross-referencing databases for sanctions or fraud alerts, and ensuring that the borrower’s information aligns with what is reported.
This step is particularly important in preventing fraud and ensuring compliance with anti-money laundering (AML) regulations.
4. Decisioning
At this stage, lenders apply complex algorithms and predefined rules to determine whether the borrower qualifies for the loan. Decisioning systems like Oscilar analyze the data collected during the credit evaluation and KYC processes to make a decision.
These systems often use machine learning models that can predict borrower behavior and assess the risk associated with the loan. The decision-making process can be automated, allowing for faster approvals or rejections while ensuring that all regulatory and risk parameters are met.
5. Document Collection and Verification
Before finalizing a loan, lenders need to gather and verify various supporting documents, such as income statements, tax returns, bank records, and property appraisals. This step can be labor-intensive, requiring meticulous verification to ensure all documents are accurate and up-to-date. Advanced LOS platforms use Optical Character Recognition (OCR) technology to automate the extraction and validation of data from these documents, reducing the time and effort involved.
6. Underwriting
Underwriting is the process of evaluating the risks associated with the loan and determining the loan terms. This includes analyzing the borrower’s financial stability, collateral value, and overall risk profile. Underwriters may use both automated tools and manual review processes to assess these factors.
The goal is to ensure that the loan is structured in a way that minimizes risk for the lender while meeting the borrower’s needs. Integration with external data sources, such as property valuation databases, can enhance the accuracy of the underwriting process.
7. Approval and Disbursement
Once underwriting is complete, the loan is either approved or declined. For approved loans, this stage involves finalizing the loan terms, generating the necessary documentation, and arranging for the disbursement of funds. This may involve integration with banking cores like Fiserv or Temenos to facilitate the transfer of funds. Efficient LOS platforms ensure that this process is seamless, reducing delays and ensuring that borrowers receive their funds promptly.
Why Loan Origination Can Be Very Challenging
The complexity of loan origination lies in the need for customization, strict compliance requirements, and the necessity for flexibility.
- Diverse Requirements: Different loan types, such as personal loans, mortgages, and small business loans, demand unique workflows.
For instance, a mortgage loan may require extensive documentation, such as property appraisals and income verification, while a small business loan might necessitate a detailed business plan and cash flow analysis.
These varying requirements make customization essential. Lenders need systems that can adapt to the specific demands of each product and borrower profile. - KYC and Decisioning: Verifying borrower identity and assessing risk are critical steps. Tools like Alloy for KYC and Oscilar for decisioning are used, but integrating these into the workflow adds complexity.
For example, integrating a KYC tool into a mortgage workflow involves ensuring compliance with both local and federal regulations, while also tailoring the decisioning process to the specific risk factors associated with different types of borrowers. - Flexibility and Orchestration: The process must be flexible to accommodate regulatory changes and market shifts. A recent example is the Federal Housing Finance Agency’s (FHFA) 2023 Loan-Level Price Adjustment (LLPA) updates, which changed the pricing structure for conforming loans. These updates required lenders to adjust their workflows to accommodate new pricing rules based on borrower credit scores and other risk factors.
Given the diversity in loan origination workflows, a one-size-fits-all approach simply won’t work.
Lenders need a system that offers flexibility—one that can be tailored to their specific needs and can orchestrate multiple processes seamlessly.
It’s no surprise that lenders are increasingly turning to technologies like low-code/no-code solutions and automation to streamline processes, reduce costs, and improve borrower experiences, ensuring they can meet the demands of a challenging market.
Build vs. Buy: The Case for a Tailored Solution
Should lenders build a custom LOS or purchase an existing solution? Building in-house allows for full customization but comes with high costs and long development times. On the other hand, buying an off-the-shelf solution might limit flexibility.
Here’s a quick comparison table to give you a better overview:
When deciding between build and buy, organizations should carefully evaluate a range of factors:
- The complexity of business processes
- Projected growth
- Budget constraints
- The necessity for customization
- Long-term implications
Will a tailored solution provide the scalability and adaptability needed for future demands? Conversely, will purchasing software entail ongoing licensing costs that could escalate over time?
Ultimately, the build vs. buy decision is not merely a technological choice; it reflects a company's broader strategic goals.
Main LOS Types and Examples
Choosing the right Loan Origination System can make a big difference in how smoothly your lending process runs. There are a lot of options out there, each designed for different needs. The table below lists the main types of LOS tools and some examples for each type.
Why Feathery is the Ideal Solution
Feathery offers a practical and effective solution for modern lenders by focusing on flexibility, automation, and seamless integrations.
Flexibility
Feathery’s greatest strength lies in its flexibility. Unlike rigid systems that force lenders to adapt their processes to the software, Feathery allows for deep customization of workflows. This means lenders can tailor every step of the loan origination process to fit their specific needs, whether they’re dealing with unique loan products, complex borrower scenarios, or rapidly changing regulations. This level of adaptability is crucial in an industry where one size never fits all.
Logic-Driven Automation
Feathery’s platform is powered by a logic engine that handles complex decision-making with ease. The system allows for the implementation of custom rules and algorithms, which means lenders can automate decision processes like risk assessment and loan eligibility with precision.
This automation not only speeds up the loan approval process but also ensures that decisions are consistent, compliant, and data-driven.
Document Workflow Suite
Managing documents efficiently is a critical part of loan origination, and Feathery excels in this area with its comprehensive document workflow suite.
There's a workflow piece that is less user-facing and more internal-facing. Once all this data has been collected, how can the company best activate this data? This means reviewing and improving the submissions, wrapping the data into your system of record like Salesforce or ERP, etc.," – Peter Dun, Founder and CEO at Feathery.
Feathery streamlines the collection, verification, and storage of all necessary documents. This includes features like automated reminders for borrowers to submit documents and easy-to-use interfaces for lenders to track and manage these documents throughout the loan lifecycle.
OCR for Scanning and Verification
Feathery integrates advanced Optical Character Recognition (OCR) technology to automate the scanning and verification of key documents such as bank statements and income verification forms. This technology drastically reduces the time and errors associated with manual document handling, ensuring that all necessary information is captured accurately and quickly.
Seamless Integrations
Feathery is designed to work seamlessly with a wide range of third-party tools and services, making it a versatile addition to any lender’s tech stack:
- Bank Pulls: Feathery integrates with Plaid and Flinks, enabling lenders to pull bank transaction data directly and securely from the borrower’s accounts. This real-time access to financial data enhances the accuracy of income verification and other financial assessments.
- Credit Checks: The platform easily connects with major credit bureaus like TransUnion and Equifax, facilitating instant credit report retrieval. This integration speeds up the credit evaluation process, helping lenders make informed decisions faster.
- Banking Cores: Feathery supports integration with core banking systems like Fiserv and Temenos. This ensures that data flows smoothly between the LOS and the lender’s primary banking systems, improving operational efficiency and reducing the risk of errors during fund disbursement.
- LOS Systems: Feathery is compatible with other Loan Origination Systems such as MeridianLink. This interoperability allows lenders to leverage Feathery’s strengths while maintaining the use of their existing systems, making it easier to transition or augment their current processes without disruption.
CashCo Financial: Feathery LOS nets 26% increase in approved loans
CashCo Financial is a Canadian-based financial services company that provides a range of alternative lending and banking solutions.
Feathery helped them launch their new digital lending product that unified their in-branch and online loan application and origination workflows to enhance efficiency and improve their customer experience.
"Feathery has helped CashCo unify our in-branch and online application experiences to provide a seamless customer experience. We are able to collect all the info we need using Feathery's out-of-the-box integrations with Flinks for bank information, LoanPro for loan management, KYC, Oscilar for decisionining and TransUnion for credit information. We've been able to increase customer conversion significantly and also added new remarketing capabilities. We also leverage the full Feathery platform, using the form builder to build the loan application, document generation for generating loan agreements and collecting e-signatures, and Document Intelligence for scanning IDs and bank statements. Feathery has also been immensely helpful in setting up and implementing our application experience," - Chief Digital Officer, CashCo Financial.
Unified Loan Application & Origination Workflows
CashCo integrated their in-branch and online loan application and origination workflows using Feathery’s platform. This unification significantly reduced the time staff spent managing and approving applications, allowing them to focus on more critical tasks. The seamless experience between in-branch and online applications also improved customer satisfaction by providing a consistent experience regardless of the application channel.
Integrated Technology Stack
Feathery’s platform allowed CashCo to easily integrate essential tools into their loan origination workflows:
- LoanPro: For managing the approved loan.
- Flinks: For securely pulling bank information.
- Oscilar: For AI-driven loan decisioning, which improved the speed and accuracy of loan approvals.
- TransUnion: For accessing credit information, allowing for comprehensive credit checks during the application process.
- Feathery: Processing IDs & bank statements for KYC
Increased Customer Conversion
By leveraging Feathery’s loan application and origination capabilities, CashCo saw a 26% increase in the number of approved loans. The platform not only enhanced the loan application process but also added new remarketing capabilities as well. These enhancements allowed CashCo to engage more effectively with potential borrowers, converting more applications into approved loans while saving hundreds of operational hours.
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