The right loan origination software can make a world of difference when it comes to lending—and a loan origination system can arguably provide one of the most impactful ways to completely transform an organization’s lending process. That’s why Canadian banks, credit unions, and financial institutions are always seeking new technologies in order to improve their lending processes and operations. If there’s a way to streamline the loan approval process or make the homebuyer’s journey a little smoother, forward-thinking financial institutions want to know about it.

One of the biggest problems banks and financial institutions face is rooted in lending processes. Traditional lending processes involve high level of tedious and sometimes complex manual tasks, including document collection, application review and verification, and a slew of other data entry challenges. These manual processes are notorious for leading to long turnaround times and bottlenecks in loan approvals. They slow down the overall lending cycle, frustrate customers, and directly impact operational efficiency. Whether it means acquiring more powerful decision-making capabilities, automating borrower risk assessments, or discovering new integrations to enhance the customer experience, banks and financial institutions are constantly exploring solutions to these challenges.

To address these challenges, many institutions make strategic, targeted investments in lending software—a broad category of technology solutions that automate and optimize the entire loan lifecycle. This includes systems designed for specific stages of lending, such as loan origination systems (LOS) and loan management systems (LMS).

We’ve covered loan management software in a previous post, but we haven’t yet explored loan origination software, the nuances between lending systems, or the opportunities this technology offers to create a more modern and intuitive lending experience.

So, what is a loan origination system? How does it fit into a financial institution’s core banking infrastructure? What are some of its key features? And what are some of the problems it can help banks and financial institutions address in their lending processes and operations?

In this blog post, we will explore the loan origination system, highlighting its unique role in the lending process. We’ll cover the key feature of an LOS and examine how it benefits banks, financial institutions, and credit unions looking to streamline their lending business. We’ll also discuss how an LOS often works alongside an LMS, to provide banks and financial institutions with a comprehensive, efficient approach to loan origination and servicing from start to finish.

What Is a Loan Origination System?

A loan origination system (LOS) is a digital platform that automates and manages the initial stages of the loan process, from application intake and document collection to credit assessment, underwriting, and loan approval. By streamlining origination and loan processing, an LOS enhances decision-making and improves borrower experiences, enabling faster loan and mortgage approvals, while ensuring regulatory compliance.

By automating key steps, an LOS reduces manual workloads, minimizes errors, and accelerates decision-making, ensuring a smoother pre-approval process. This not only benefits lenders by improving operational efficiency, but it also creates a better experience for borrowers, who can receive faster loan decisions with fewer delays. In fact, modern loan origination systems can even bring approval time to within a few minutes, and loan funding to within 24 hours.

An effective LOS is equipped with various features and functionalities that cater to the complexities of the lending process. These digital lending capabilities not only simplify the workflow for financial institutions but also enhance the overall experience for borrowers.

Let’s look at some key features of a loan origination system.

Key Features and Functionalities of a Loan Origination System (LOS):

• Application Intake: Digital forms that enable borrowers to easily submit their loan applications online, providing a user-friendly interface to gather necessary information.
• Application Processing: Automatic validation of submitted information to reduce errors, ensuring that applications are complete and ready for review.
• Document Management: Secure collection, storage, and retrieval of necessary documentation (e.g., income verification, credit history), along with e-signature capabilities for remote signing.
• Credit Assessment and Scoring: Integration with credit bureaus for instant credit reports and automated scoring algorithms for real-time credit assessments.
• Underwriting Automation: Automated underwriting processes that evaluate borrower risk using predefined rules and algorithms to help streamline decision-making.
• Regulatory Compliance: Built-in compliance checks and anti-fraud controls to adhere to relevant regulations and audit trails for accountability.
• Integration Capabilities: APIs that allow seamless integration with other financial systems and compatibility with third-party platforms.
• Reporting and Analytics: Dashboards providing insights into loan performance metrics and customizable reporting tools for operational analysis.
• Customer Relationship Management (CRM) Features: Tools for tracking borrower interactions and automated communication features to enhance the customer experience.

These features work together to create a streamlined and efficient loan origination process, significantly reducing manual workloads and errors. Collectively, they improve decision-making, accelerate loan approvals, and provide a better experience for borrowers.

Ultimately, an LOS enables banks, credit unions, and other financial institutions to modernize their operations and enhance the overall efficiency of their lending services.

How Does Loan Origination Software Streamline Lending?

So, how exactly does an LOS enhance the efficiency of a bank’s lending services? Well, an LOS streamlines the lending process by automating traditionally manual and time-consuming tasks, such as application intake, document collection, and credit assessment. By digitizing and automating these tasks, the system eliminates a lot of the inefficiencies rooted in manual data entry. That reduces the risk of human error and speeds up loan approval times.

Integrated workflows within an LOS also ensure that loan and mortgage applications are processed faster, allowing financial institutions to handle larger volumes of loans and mortgages without sacrificing accuracy or compliance requirements.

This approach helps address some critical challenges that lenders face, like delayed approvals due to incomplete documentation, inconsistent underwriting decisions, and bottlenecks caused by manual reviews. For example, by automatically validating applicant information and integrating credit reports, an LOS allows underwriters to focus on risk assessment rather than paperwork.

An LOS doesn’t completely eliminate manual intervention from the lending process. Not for everyone, anyway. But it comes close. It can provide significant automation and efficiency gains, while eliminating redundant tasks, ensuring that underwriters can spend more time focusing on what really matters—making sound lending decisions.

What’s the Difference between a Loan Origination System and a Loan Management System?

While both an LOS and LMS are both key components of a financial institution’s banking technology, these lending software solutions can often serve distinct functions. It’s important to remember that every financial institution is different. Their systems are different. Their processes are different. And their technology is different. With countless iterations of underlying technology solutions often spanning decades, it’s not uncommon for financial institutions to have a collection of modern platforms, modular core banking solutions, and other legacy technology integrated with a pre-existing core banking system.

With this in mind, it’s important to note the nuances. Some mortgage software and loan management lending solutions offer workflows that cover the entire lending lifecycle from origination to funding to servicing. But, as we mentioned, there are often key differences between loan origination systems and loan management systems. So, what’s the difference between and LOS and an LMS?

Generally, an LOS focuses on the pre-approval stages of the lending process, assisting with loan application processing and document management and credit assessment. An LMS takes over after the approval stage, managing the loan or mortgage through repayment and servicing until it reaches maturity.

Together, these two systems cover the full lending lifecycle, providing financial institutions with powerful tools to efficiently manage loans and mortgages from start to finish.

How Do Loan Origination Systems Work with Loan Management Systems?

Although a loan origination system and a loan management system can serve distinct roles in the lending process, they often work together to ensure seamless end-to-end loan management. The transition between an LOS and LMS is critical for maintaining data integrity, speeding up operations, and providing a seamless experience for both lenders and borrowers.

A modern LOS generally handles the pre-approval and origination stages—such as application intake, document verification, and underwriting—up until the loan is approved. Once a loan is approved, the LMS takes over, managing the loan’s lifecycle through repayment and servicing. This includes tasks like tracking payment schedules, calculating interest, processing payments, generating statements, and ensuring compliance throughout the loan’s duration.

The Role of Application Programming Interfaces (APIs) in LOS and LMS Integration

The smooth collaboration between LOS and LMS is often achieved through integration using Application Programming Interfaces (APIs). APIs facilitate the secure and real-time transfer of data between the two systems. Like a messenger, an API ensures that critical information like borrower details, loan terms, and underwriting decisions are automatically and securely transferred from the LOS to the LMS without manual intervention, allowing financial institutions to maintain efficiency and accuracy across their operations.

Using APIs, the integrate systems can also connect with other financial tools, as well as other systems used in a bank’s infrastructure, including customer relationship management (CRM) platforms, compliance monitoring systems, and credit-scoring models. This creates a streamlined environment where data flows freely and securely between multiple platforms, creating a comprehensive, integrated ecosystem that enhances productivity and improves the lending experience.

5 Benefits of Implementing Loan Origination Software for Lenders

It should be obvious by now: A loan origination system is a powerful way to transform a financial institution’s lending operations. The right system will not only streamline lending leading to faster and more efficient loan approvals, but it will also help banks and credit unions prepare for a future of personalized banking that meets the expectations of digital native consumers, while supporting business partnerships, integration, and interoperability.

In fact, an LOS has the potential to make the single biggest impact to user experience—not just the borrowers experience, either, since lending software paired with APIs can even help financial institutions transform the lending experience for their own internal underwriters and loan management professionals.

Ultimately, loan origination systems offer a wide range of benefits, helping financial institutions overcome traditional challenges in the lending process. If we were forced to narrow it down, these are the five key advantages of adopting an LOS for banks, credit unions, and other lending institutions:

1. Improved Efficiency and Faster Loan & Mortgage Processing
   By automating manual tasks such as application intake, document collection, and credit assessment, an LOS dramatically reduces turnaround times. This efficiency enables financial institutions to process a higher volume of loan applications without sacrificing accuracy.
2. Enhanced Accuracy and Reduced Human Error
   An LOS automates data entry, document verification, and compliance checks, minimizing the likelihood of errors. Automated workflows ensure that tasks are completed consistently and accurately, reducing the risk of compliance issues or mistakes that could slow down the approval process.
3. Increased Loan Approval Speed and Customer Satisfaction
   Faster loan and mortgage approvals lead to a better experience for borrowers, making the overall lending process smoother. An LOS can integrate real-time credit scoring, instant document validation, and automated decision-making to further accelerate loan approval timelines, ensuring customers are not left waiting.
4. Strengthened Compliance and Risk Management
   Built-in or configurable compliance features allow financial institutions to stay aligned with ever-changing regulatory requirements. By automating audit trails, risk assessments, and reporting, an LOS helps mitigate risks associated with manual compliance processes, making it easier to meet legal standards.
5. Integration with Other Core Banking Systems
   LOS platforms integrate seamlessly with loan management systems (LMS) and other banking tools, creating a unified ecosystem. Through APIs, an LOS can connect with third-party tools, CRM platforms, and credit-scoring models, ensuring that data flows smoothly between systems to enhance operational efficiency and decision-making.

Loan Origination Software Will Drive the Future of Lending

Over the past decade alone, banking has changed dramatically, driven by changes in technology that promote personalized, self-serve, data-driven digital banking experiences. With a focus on personalized banking—as well as core modernization and cloud adoption—many financial institutions may be realizing that their legacy lending platforms and processes have been neglected. With APIs and increased competition in the lending space, there’s never been a better time to explore opportunities offered by loan origination software and lending technology.

As we explored, implementing an effective loan origination system that automates key processes and significantly reduces manual workloads, minimizes errors, and accelerates the loan approval process will help ensure seamlessness in an organization’s lending lifecycle.

As the industry continues to evolve, technology will continue to drive the future of lending. This makes it imperative for organizations to uncover lending solutions that address traditional challenges while providing the foundational technology that will position them for future growth and success. And with the increasing adoption of APIs in the banking industry, strategic investment in new systems can also help protect investments in trusted core and legacy systems, creating a comprehensive suite of technology that’s tailored for any financial institution’s unique needs.

For instance, our Equitable Bank case study explores how one Canadian bank used Portfolio+’s API to launch its own loan origination system, leveraging a pre-existing loan management system to create a modern user experience for its underwriters, while transforming its lending technology.

Ultimately, a loan origination system can help financial institutions meet the demands of modern borrowers and create a more intuitive lending experience for internal underwriters, while providing a more efficient, compliant, and user-friendly lending environment overall.

Lending is a complex process. By leveraging the capabilities of an LOS, financial institutions can mitigate some of those complexities and creating a better borrowing experience.

For more information on Portfolio+, including its API and loan origination capabilities, loan management software, lending software, cloud-based banking solutions, or its core banking system, contact us today!

Sources:

https://www.investopedia.com/terms/o/origination.asp (Retrieved October 16, 2024)

https://en.wikipedia.org/wiki/Loan_origination (Retrieved October 17, 2024)

https://www.mckinsey.com/capabilities/risk-and-resilience/our-insights/the-lending-revolution-how-digital-credit-is-changing-banks-from-the-inside (Retrieved October 18, 2024)

https://www.investopedia.com/terms/a/automated_underwriting.asp (Retrieved October 21, 2024)

The post What Is Loan Origination Software? appeared first on Portfolio+.

The thing is, sometimes things don’t have to be broken to be, well, bad. You don’t still use a rotary phone as your primary tool for communicating, do you? Of course not. That’s probably because relative to a modern-day smartphone that connects you to the world, keeps you up to date on current events, and stores all those adorable photos of your pet Yorkshire Terrier, Charlie, a rotary phone is bad. It’s not broken—it’s just bad! We have higher expectations of what a phone can do for us, and while it’s still functional a rotary phone no longer provides the best possible experience. The point is, just because something isn’t broken doesn’t mean it shouldn’t be replaced with something better, something exponentially more efficient, and something that ultimately creates a better experience for the user. Unfortunately, the financial services industry has seemingly built a reputation for this kind of technological complacency, partly because for heavily regulated banks and financial institutions replacing outdated technologies can be especially complex and expensive, while also taking considerable time and resources and introducing risk. Alternatively, changing financial service providers because our financial institutions can’t meet our expectations can feel almost as cumbersome for consumers. 

Things don’t have to be bad! 

Technology and innovation can make even the most efficient products and solutions painfully inefficient over time. Although it might seem unconvincing, financial services technology isn’t immune to this kind of technological innovation. (Even though with legacy banking systems, it can sometimes feel that way.) With enough time, advancements in technology and continuous innovation can make great products and solutions intolerable, and that’s why traditional loans and mortgages—along with the financing processes we use to originate and underwrite them—are in desperate need of replacement. While mortgages and loans still do the jobs they were designed to do, the traditional lending process is incredibly inefficient, and with the pandemic accelerating digital transformation in the financial services industry, many lenders, banks, and financial institutions are finally considering replacing their traditional lending processes and solutions with digital lending.     

So, what is digital lending? Digital lending is the combination of modern financial services technology and improved, data-driven financing practices used by lenders, banks, and financial institutions to provide consumers, businesses, and potential borrowers with a self-serve, automated, end-to-end lending experience—one that’s provided entirely online through a secure mobile lending or banking app. 

Driven by a post-pandemic shift in consumer preferences for digitalized financial services, digital lending technology has quickly become a critical component for every modern lender. While the pandemic in the early 2020’s made it challenging to apply for a loan or mortgage in person, for many lenders it also exposed the immediate need for improved digital lending solutions that could meet rising consumer expectations for a quick, seamless, and entirely digital financing decision. 

The technology provides a streamlined, app-based loan origination process that makes it easy for consumers, business owners, and other potential borrowers to apply for a loan or mortgage and receive an approval and funding decision online. While digital lending technology includes all aspects of the traditional lending process, it provides considerable efficiencies in origination and automated underwriting. A comprehensive digital lending solution will even allow banks to integrate with important third-party applications and other critical industry partners, including providers of home and property appraisal solutions and credit bureaus.  

Digital Lending Provides Valuable Benefits for Both Consumers and Lenders Alike

For both consumers and lenders, digital lending can provide improved efficiencies in all areas of the lending process from the initial application for a loan or mortgage to pre-approval, underwriting, funding, closing, and even servicing. 

Let’s start with the consumer. The proliferation and rise of consumer electronics and mobile technologies over the last two decades has ultimately created a new generation of tech-savvy, digital-native consumers. These consumers, many of them now prospective home buyers that fall into the key demographics for financial institutions, mortgage brokers, and lenders, have developed an expectation that financial services and the technology provided by financial institutions and lenders should provide the same kind of digital experiences that they have become accustomed to through interactions with apps and products developed by Big Tech companies—companies like Facebook, Amazon, Apple, Microsoft, and Google. Applying for a loan or mortgage on a mobile device and receiving a decision within the same day is no longer considered a convenience—consumers actually expect it. 

Consumers aren’t the only ones that benefit from digital lending, either. For financial institutions and lenders, originating a loan or a mortgage is a complex manual process, and it requires the collection of a considerable amount of personal financial data—data that’s often already stored within financial systems. In addition to requiring a credit report from an external party, every loan and mortgage application also requires lenders to collect and review financial documents and information, including an applicant’s proof of income, financial history, paystubs, T4 slips, and, for mortgages, proof of down payment. 

These manual processes are not only time-intensive, but they’re incredibly costly for lenders. They also create an unpleasant experience for home buyers and borrowers that are expecting a seamless digital experience but are faced with a fragmented lending process that puts unnecessary emphasis on the details of a financial product rather than the experience of purchasing a home. Digital lending has the potential to change all that.

Digital Lending Simplifies and Streamlines Loan and Mortgage Applications

The most obvious benefit of digital lending is the direct impact it has on the customer experience. Remember, consumers are actively reviewing features, comparing products, and making purchasing decisions on their mobile devices every single day. This is where consumers want to engage with brands, so banks and lenders should focus on streamlining the customer journey and making it easy for them to review, compare, and make decisions on loans and mortgages from their mobile devices. While the lending process deserves a fully digital, end-to-end financing experience, simply having a digital loan or mortgage application available to consumers can be a major factor in a consumer’s choice of lender. 

Digital lending makes it easy to apply for a loan or mortgage by integrating the origination process into an online experience and making loan and mortgage applications available within a browser or mobile app where the borrower can fill out personal information on their own time and in their own place. It allows consumers to snap photos of important financial and personal documents and upload them instantly. With digital lending technology that provides the ability to leverage electronic signatures, consumers can even avoid unnecessary meetings where they must sign mortgage documents in person. Instead, they will have the convenience of a truly end-to-end digital origination experience. 

While providing a vastly superior customer experience, digital lending is not only more convenient for consumers, but it also makes it easy for them to understand what information they need to provide in order to receive a funding decision. Integrated directly into the user experience, this adds a level of transparency to the lending process that can help not only set expectations with borrowers, but it also reduces errors and prevents delays in underwriting and processing applications. 

By simplifying the loan and mortgage application process through digital lending and providing consumers with a better customer experience, lenders will benefit from the reduced internal costs of origination, while also eliminating some of those time-intensive manual processes.

Digital Lending Offers Faster and Better Underwriting Decisions 

In Canada, getting a mortgage can generally take consumers anywhere from 10 – 25 days. It’s a long process, especially when the majority of online mobile transactions happen almost instantly. Digital mortgages provided through a digital lending solution that leverages automated underwriting technology could reduce the turnaround time for mortgages from weeks to days, and for smaller loans it could even allow lenders to provide instant approvals. Buy-Now-Pay-Later (BNPL) lending solutions, for example, are digital lending solutions that are integrated into point-of-sale purchasing experiences, providing consumers with instant financing. 

The ability to offer automated underwriting within a digital lending experience—for everything from personal loans to auto loans and even mortgages—increases the potential for increased business for banks and lenders and could effectively translate into both increased revenue and increased growth, while contributing to positive customer sentiment. 

By leveraging underwriting algorithms and predefined data requirements, automated underwriting in a digital lending solution provides a faster, more efficient way for lenders and financial institutions to analyze risk and make instant financing decisions. And while consumers experience the benefit of faster approvals, lenders experience the benefit of cost efficiencies and better-quality underwriting decisions. Automated underwriting technology is even powerful enough to flag applications that require manual review. 

Open Banking Will Create New Digital Lending Opportunities 

While it has the potential to truly revolutionize the way consumers access lending products like loans and mortgages, digital lending still has some immediate challenges. One major challenge is that some core banking and lending software providers may not yet be ready for that revolution. 

Mandates and physical distancing requirements during the pandemic meant that an increased demand for digital lending and virtual financial services happened quicker than the industry could have anticipated. Driven by the pandemic, the accelerated shift toward digital lending and the increased demand created a new level of urgency for lenders and financial technology providers to replace, redesign, and develop new platforms and digital financing solutions that could support innovative, customer-centric digital lending experiences. While that sense of urgency would normally drive technology providers to innovate, an excess of urgency in the industry today is forcing some fintechs and software providers to make tough decisions and prioritize. 

From modernization and digital transformation to cloud migration strategies, financial technology and core banking providers have been juggling multiple complex large-scale initiatives to support financial institutions and lenders in preparation for a paradigmatic shift in the industry, as Canada prepares for the launch of an open banking framework in the coming months. Already implemented in other international jurisdictions, including the UK and Australia, an open banking system—also known as consumer-directed finance here in Canada—will promote competition and consumer choice in the financial industry and allow Canadian consumers to easily transfer their financial data between financial institutions, service providers, and third-party fintechs.

As banks begin their monumental shift to the cloud in preparation for open banking, their financial technology and core banking software providers are creating application programming interfaces (APIs) and critical API endpoints that will provide the foundational technology to allow for secure data sharing in an open banking ecosystem. As a result, financial technology and banking software providers are likely to find themselves playing catch-up in the coming months in order to redesign and develop new mortgage and digital lending solutions that lenders and financial institutions can rely on. For some of these financial technology providers, a trusted digital lending solution may take more time. 

Fortunately, open banking will provide traditional banks and lenders with even more opportunities for developing new and innovative digital lending solutions, since those APIs will allow for fintechs to build applications and services around financial institutions and perhaps integrate with some of those time-tested traditional mortgage and lending systems. 

Ultimately, Digital Lending Offers a Faster, More Efficient, and More Enjoyable Lending Experience

A digital origination and underwriting experience that offers borrowers quick financing decisions has many, many benefits. It’s faster and more efficient. It offers consumers a simplified and streamlined digital financing or home buying experience where they can receive a financing decision online instantly or in a fraction of time, it takes traditional lenders using manual processes. 

In addition to providing a better user experience to consumers in a format where they are more willing to engage and through an interface that offers increased transparency, it also offers lenders considerable cost savings by eliminating time-consuming manual administrative processes, which helps to reduce errors and delays in the application process. 

While mortgages aren’t completely broken, they’re awfully close. It’s no secret that traditional lending processes are becoming increasingly intolerable to tech-savvy, digital-native consumers. These consumers expect more from their financial institutions, and while the window is closing there’s still time for banks and lenders to embrace change through digital lending technology and innovative customer experiences. 

With open banking on the way, lenders and financial institutions have a small opportunity to rethink their approach to traditional lending and improve their digital lending experiences. For digital mortgage providers, it’s important to challenge pre-existing perspectives, focusing less on the transactional experience that emphasizes the details of financial products to reimagine and reinvent the overall financing experience. 

Things don’t have to be bad!

While digital lending can improve the customer experience, simply moving pre-existing manual processes into a digital experience may not be enough to create the ideal borrower experience. Be creative! Great digital lending experiences are made by breaking down barriers in our traditional processes, rethinking traditional financing, and focusing on a consumer-first, digital experience.

Stop forcing home buyers into the experience of getting a mortgage—guide them through the experience of buying a home.  

Sources: 

https://relevant.software/blog/open-banking-changes-lending-industry/ (Retrieved May 3, 2022) 

https://www.forbes.com/sites/brendarichardson/2021/05/13/how-digital-technology-changed-the-face-of-the-mortgage-industry/?sh=48c29d112856 (Retrieved May 10, 2022)

https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/the-power-of-digital-lending (Retrieved May 11, 2022) 

The post What Is Digital Lending? appeared first on Portfolio+.