Bad Loan Origination Software Vs. Good Loan Origination Software

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Loan origination can come in two forms. There are financial institutions (FIs) that have good loan origination software and enjoy the benefits, and there are FIs that have bad loan origination software and are not reaping the benefits that they could be. The following article can help distinguish between the two.

Manual Processes 

The Bad

Legacy systems that are outdated will have automated parts of the processes that do not allow manual reviews. When a manual review is needed, the application will leave that automated system to have the stipulation cleared. Once the application is ready to be processed again, it will either start from the beginning of that automated process or the manual reviewer will be required to manually finish the rest of the application. This requires a large staff and a lot of extra time.

The Good

Good loan origination software will automate every possible step that can be automated and allow the workflow to easily and seamlessly switch between automated and manual processing. When a stipulation occurs, the application can be sent to a review queue where the manual reviewer can clear that stipulation and send it back into the automated system at the exact point that it left. This allows manual reviewers to spend all of their time clearing stipulations instead of working through criteria that could have been sent through the automated process. With good loan origination software, banks can have a smaller staff that is more efficient and productive.

Flexibility

The Bad

Bad loan origination software will detract from the FI's ability to change with the market. Our economic environment is changing and banks need to be able to anticipate and respond to changes in the market as quickly as possible. With some loan origination software, IT must manually code any attributes that need to be changed. Once the code is changed, it requires extensive testing to make sure the coding was successful and can be put into use. Testing takes time and that is time that FIs don't have.

The Good

Good loan origination software will give the control to the business user. The business user should be able to easily change and test new criteria and attributes. Loan origination software should allow FIs to run old data through the system using new criteria and compare the results. They can see what accounts have actually gone delinquent and compare that to how many of those accounts would have been eliminated based on the new criteria. This allows FIs to use past data instead of waiting for the results of a traditional champion/challenger test. Testing in this way, allows FIs the ability to change their criteria to be as effective as possible and to stay on top of the market.

Data Sources

The Bad

Bad loan origination software will have few connections to data sources. With few data sources, FIs have a smaller picture of who their customers really are. This can lead to more risky lending decisions. It can also lead to higher incidence of fraudulent accounts. Another way this can affect a FI is when customers applying for products have thin credit histories. If FIs don't have access to alternative data sources, they could be turning away potentially profitable customers.

The Good

Good loan origination software will have a variety of data sources to choose from. They can use this data to increase their market share with customers who are credit-worthy and just don't have traditional credit data.  Risk decisioning can use alternative data to determine whether or not a person is likely to make it through the application process for a certain product. This saves the bank from pulling much more expensive consumer data on the people who are not likely to complete the application process. FIs with good loan origination software have "the big picture" and have a better sense of who their customers really are.

The moral of the story is clear: make sure you have good loan origination software.  It will help you be a more informed and profitable lender.

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