The loan origination process is the first step in loan/financial services. This is the most crucial stage in the complete loan repayment. The finance industry is now focusing on customer engagement and satisfaction by meeting customer expectations with service of confirmation and delivery.
The word “loan origination” which refers to where a loan begins and where finishes, is defined differently by almost every lender. There are different steps within the process a different approval process, either manual or automated, exists for each of its loan types. Lenders have their own “secret sauce” when it comes to loan origination that sets companies apart from their competition. The loan origination system manages everything from pre-qualification to loan funding approval.
The steps that are essential to the loan origination process are listed below:
1) Pre-Qualification Process
The pre-qualification procedure is started by the lender as the initial stage of the loan origination process. The lender provides a list of items to the potential borrower that they need to submit to obtain a loan. The list includes ID proof/address proof, current employment information including salary slip, credit score, and bank statement/previous loan statement. The lender evaluates the paperwork after receiving the necessary data and issues a pre-approval, enabling the applicant to proceed with the loan application procedure. Every lender has a unique loan origination procedure, with a varied beginning, multiple steps, and different ending points. Every loan type has a different approval process that can either be manual or automatic, lender has their unique way.
2) Loan Application
The borrower completes the loan application at the second step of the loan origination procedure. Lenders are shifting towards an Artificial intelligence (AI)version that makes this stage paperless, although sometimes the application can still be paper-based. New technologies allow completing the application online through a website and mobile app, and collected data can be tailored to specific loan products.
3) Application Processing
The credit department receives the application at this stage and reviews it for accuracy, genuineness, and completeness. If any required fields are incomplete, the credit analyst will return the application to the borrower and reach out to them for the missing information.
Lenders use the Loan Origination System (LOS) to assess the creditworthiness of borrowers.
A better LOS enables a lender to set up workflows for loan processing. It can automatically identify files with missing required fields, return them to the borrowers, and notify the sales and credit departments to rework them. Exception processing may also be part of this stage, depending on the organization and process.
4) Underwriting Process
Once a borrower completes an application, the underwriting process begins. The lender checks the application by taking various components into account including credit scores, risk scores, and unique criteria for scoring that may be specific to their industry or business. This process is now fully automated with the help of a rule engine and API integrations with credit scoring engines such as CIBIL and EXPERIAN (it’s a company for credit information ) in LOS. The lender calls load underwriting guidelines specific to their services in a rule engine.
5) Credit Decision
The underwriting process will approve, deny, or send an application back to the originator for additional information based on its results. The system’s rule engine may automatically change the parameters, such as reducing the loan amount or charging the interest rates if certain criteria do not match.
6) Quality Check
Lenders consider the quality check stage of the loan origination process critical because lending is highly regulate. The quality control team receives the application and analyses critical variables against internal and external rules and regulations. They perform the last check on the application before it goes to funding.
7) Loan Funding
Loans typically receive funding shortly after signing the loan document. However, loan modules such as second gold loan, vehicle loan, personal loan, home loan, SME loan, Loan Against Property, and lines of credit may require additional time for legal and compliance reasons. To ensure that all necessary documents are execute before or at the time of funding, LOS can track funding. If you want to enhance your customer experience, so now get loan modules in less than 5 minutes. And check out Wind’s Loan Origination software.
The financial services industry considers the loan origination process as of outstanding importance. And it has become even more critical with the increasing focus on customer satisfaction. Understanding each step of this process can help lenders to provide timely approvals and meet customers’ expectations better. With Wind’s Loan Origination system lenders are able to streamline their process, shorten wait times for approval, and enhance customer experience significantly. We hope that our insights into the loan origination process have been useful to your efforts toward providing excellent financial service.
Frequently Asked Questions (FAQ)
What is the LOS system?
Lenders play a crucial role in the loan application process by utilizing the loan origination system (LOS). LOS helps simplify and streamline the application and approval process, reducing the potential for error and inaccuracies. By effectively managing loan applications, reviewing, documentation, and making informed decisions quickly, lenders can benefit both themselves and borrowers. LOS ultimately makes the loan application process smoother and more efficient. As technology continues to evolve, LOS is likely to become increasingly sophisticated and widely adopted in the lending industry.
What is the difference between LMS and LOS?
Both loan management systems (LMS) and Loan origination systems (LOS) serve important features in the lending industry, but they have significant differences between them. LMS focus on managing loans post-origination, while LOS is focuses on originating loans. LMS helps lenders automate and streamline their loan servicing processes and loan applications and captures data. Ultimately, a lender’s individual needs will determine which system to utilize. But knowing the differences between the two streamlines the decision-making process.
What does LOS software stand for?
Financial institutions use loan origination system (“LOS”) technology to generate loan documentation that complies with regulatory and internal requirements. Banks and credit unions typically install loan origination software on their local servers or access it through a cloud-based platform.