For many financial institutions, loan originating processes remain the most complex and time consuming of all operations. Approvals of mortgage loans can take weeks to be approved. Commercial loans have to go through multiple reviews before they are approved. Consumer loans do have shorter approval timelines, however, the accumulation of even short delays adds up quickly when volume is high. Borrowers immediately sense that delay in processing their loan request. The internal team members experience added pressure from increased workloads. The leadership sees an increase in operating costs and lost opportunities for growth as a result of inefficiencies. To effectively manage the challenges associated with loan management; most lenders are implementing loan origination software. It can assist in automating the majority of manual tasks, improve accuracy by reducing errors, and provide structure for lending workflow. However, choosing a system is the initial step. But it is how you implement the chosen system will determine whether it improves the efficiency of your operations, or creates new challenges for your organization. In this article, we explore loan origination system best practices to help multi-loan institutions ensure successful implementation of the system and to establish long-term.
What is a Loan Origination System? The Loan Origination System manages the entire process of originating a loan from initial borrower application to final loan approval/closing. It combines borrower information/documentation, underwriting guidelines and compliance checks in one location. Modern Loan Origination System software have evolved from their traditional role of processing loans. Today’s systems support multiple types of loans, automate workflow, enforce consistent lending policies, and provide pipeline performance visibility. For institutions offering mortgages, business loans, and consumer products, this flexibility is necessary. As an example of how a loan origination platform works, it serves as a shared operating layer. It can connect teams that often work separately; and it makes sure that all the teams are using the same processes even when they have different types of loan products.
How Loan Origination Systems Fit into Multi-Product Lending Institutions? There’s much pressure on today’s lending organizations from multiple directions. Borrowers demand decisions and digital experiences that are fast. Regulators demand strong controls and clear audit trails. Executives expect efficiency and scalability in their operations. Manual processes and disconnected systems face challenges to meet these demands. This is why los software has evolved into a core system rather than a supporting tool. When a system is executed properly, it will help to assist institutions with: Streamline the approval time for all types of loans Provide more consistent credit decision-making Decrease the operational risk and reduce the number of rework Enable a financial institution to grow its lending operations without growing the headcount The benefit of an effective system will be dependent upon how the system is implemented. If a system is poorly configured by a financial institution, then it may actually reinforce inefficiency rather than eliminating it.
Implementation Is an Operational Change, Not Just a Technical Task One of the most common errors lenders commit during their Loan Origination System implementation is to treat it solely as an IT project. An LOS impacts almost every aspect of the lender’s organization. Each rule within an LOS defines how lending decisions are made. And each integration will define how lending-related information is exchanged between different departments or teams. Without coordination among business teams and IT teams, it is possible that the system will be working but will not deliver any real performance or improvement. Institutes who are successful in their LOS implementations view it as an operational change initiative. They involve their senior level leadership; establish ownership of the LOS throughout all departments within the organization. And they treat the LOS as a long-term capability, rather than a one-time event or deployment of software. Let’s move towards how the best LOS implementation practices can make a difference.
Best Practice 1: Define Goals before Configuration Begin Before configuring a loan origination system, institutions should determine what they want to accomplish with their new software. These goals may be reducing approval time, increasing volume of loans, improving accuracy or enhancing compliance controls. Having clearly defined goals will help your team make better decisions during the implementation process. It prevents unnecessary customization and helps keep the project focused on its objectives. Also, having well-defined goals makes it easier to measure success after the system is live which is often overlooked in how to implement loan origination software effectively. Goals must be realistic, measurable and shared across teams so everyone is working towards common goals.
Best Practice 2: Map Actual Lending Processes From Start To Finish Multi-loan institutions typically don’t have one loan origination process. Each type of lending (mortgage, commercial, consumer) has its own set of steps, approvals, and exceptions. Before setting up a new loan platform, teams need to document how loans currently flow through their institution. It includes hand-offs, manual processes, and common bottlenecks. Thus, it helps reveal operational inefficiencies that technology can’t solve on its own. In this way, organizations ensure that their loan origination platform supports their current operational needs. Rather than forcing them into a loan origination process that is either too inflexible or unrealistic.
Best Practice 3: Build a Cross-Functional Implementation Team Since, an LOS (Loan Origination System) touches multiple roles, it is best to share ownership for its implementation. A strong cross-functional implementation team usually has representatives from lending, underwriting, compliance, operations and IT. This team assists in translating the business requirements into system configuration. They also help with testing, assist with training of end users and serve as subject matter experts once the LOS is live. Their participation will increase adoption and reduce resistance to change. When teams feel that their roles are being represented, they are more likely to trust and use the system as intended.
Best Practice 4: Focus on Data, Integration, and System Connectivity To achieve success with loan origination system software, a high-quality data set is the key. LOS can automate many processes, but incomplete or inconsistent data limits automation and create unnecessary risk. Before implementing an LOS, institutions should take careful consideration when planning their system integrations with other internal/external systems. Such as, core banking platforms, credit bureaus, document management systems, CRM applications, etc. For institutions utilizing Encompass, they also need to develop strategies for utilizing Encompass Integration Services to ensure that data flows smoothly between all integrated systems. Establishing clear data governance policies (access controls, validation criteria, audit logs, etc.) help protect against non-compliance and provide for long-term scalability.
Best Practice 5: Start Training Early and Proactively Manage Change User-friendly LOS systems still require a team to learn to use them. The time required for teams to learn new workflows and become confident in using the system is real. Teams require training prior to “go live” and continue afterwards. Training should be role based, hands-on, and focus on each daily operation. The issue of change management is equally important. There could be concerns from staff about automation affecting their roles, decision making power, etc. Transparency and clear communication regarding why the new system was implemented (and how it enhances outcomes) reduces the uncertainty that many staff members have, and builds confidence and trust with the system.
Best Practice 6: Test Real-World Lending Scenarios Tests should reflect the way real-world loan processing works as opposed to an ideal process. Therefore, tests need to include missing documentation, exceptions, compliance audits, and any last minute changes to the process. End users involved in the testing are able to help find problems early on and build a level of confidence with the new system before launch. In addition, this type of testing is going to reduce the possibility of disruptions that can affect customers or staff once you have launched. Comprehensive testing is the best way to protect both operational stability and customer experience.
Best Practice 7: Roll Out In Phases and Plan f or Continuous Improvement Rolling out all of your loan products at once is high-risk. Most financial institutions start with one product or one business unit at a time and then expand to other areas over time. Post-launch, a team can track performance metrics, receive user feedback, and ensure ongoing compliance with regulatory requirements. As an organization grows and regulation changes, a Loan Origination System (LOS) should grow as well. The ability to continuously improve your LOS will ensure it meets your organization’s long-term objectives.
Positive Business Outcomes of a Well-Implemented LOS The business outcomes for companies that implement loan origination systems effectively include: A faster and more consistent loan approval process. Compliance reporting and tracking are improved. Borrowers have a better experience due to greater transparency in their loan application processes. Companies get greater operational efficiencies and ability to scale. Industry research has shown that lenders and institutions who use fully integrated lending platforms can achieve reduced processing costs and increased productivity of employees, particularly as volumes grow.
Conclusion As a lender or multi-loan institution, adopting an LOS is a strategic decision which will have lasting impact. While the technology is important, it is far more important how you implement it. If you follow Loan Origination System Best Practices — from establishing goals to creating a process map through to training and optimizing your LOS — lenders will be able to create a stable foundation for future growth. To compete in today’s lending market, those institutions that choose to view their LOS implementation as a business transformation are better positioned to adapt, scale, and deliver value to their borrowers.
