How to automate Loan Origination Processes?

As digital transformation continues to accelerate across various industries, with the market projected to have a spending value of USD 1548.9 billion by 2027^[1], the financial sector is also finding ways to leverage emerging technologies for facilitating automation and digitalization of lending processes. 

The formalized loan origination process (LOP) is lengthy and susceptible to human error. Moreover, the entire process can take several weeks to a few months. Lenders want to speed up the LOP, taking it from months or weeks to days. Aside from the lengthy process, some challenges that loan origination automation seeks to overcome include document collection, minimizing human error, streamlining disparate systems, improving transparency, and providing better experiences for borrowers. 

The advent of loan automation accelerates the entire LOP, making it more cost-effective for lenders, speeding up loan disbursements, allowing borrowers to avail loans at their convenience, and giving lenders access to more comprehensive, real-time data. All of this combined reduces the need for human effort and allows lenders to make informed decisions faster. 

Streamlining the loan origination workflow through automation allows lending organizations to overcome the pitfalls associated with formalized LOP, offer better customer experiences, and improve their practices. 

This article sheds light on the importance of automating each stage of the loan origination process, how borrowers can benefit from an automated LOP, and how lending organizations can leverage innovative solutions like low-code automation platforms to improve and standardize their LOP.

Why should lenders automate the loan origination process?

Today’s consumers expect effective and seamless loan experiences and services that can be accessed anytime, anywhere. However, the loan origination process is often viewed as complex because of its time-consuming nature and because it's prone to inconsistencies that can lead to profit variance. To keep up with changing expectations, lenders must incorporate new banking technologies to provide improved experiences to their clients and stay competitive.

Competitive advantage:

FinTech companies are making it easier for consumers to access loans, posing a significant challenge to lending institutions. 

A 2022 study ^[2] found that aside from the growing number of FinTech companies, their services have enabled over 50 percent of consumers to get loans faster, with some personal loans being issued within the same day the application was filed and completed. 

This further drives home the point that for lending institutions to remain competitive, they need to adopt new technologies and rethink their existing LOPs.

Risk Management:

Automation allows financial institutions to conduct more robust risk assessments and better credit decision-making processes, allowing them to maintain the quality of their loan portfolio. 

By automating their loan origination process, lenders can offer more value to their clients while creating a more sustainable business model through improved efficiency, enhanced profitability, and minimized the impact of workflow deviations.

Borrower's expectations

By automating the loan origination process, it becomes possible to not only meet but surpass borrowers’ expectations. You can offer more personalized experiences to borrowers and make it easier for them to apply and get approved for loans.

Improved profitability

Manual processes and disparate systems can slow down lending teams by bogging them down with time-consuming repetitive tasks. By streamlining the entire loan origination process and automating repetitive tasks, lending teams can get more done in lesser time, which can directly lead to an increase in profitability.

What are the challenges lenders face in the loan origination process?

Below are some of the major challenges lenders encounter in their loan origination process:

Compliance challenges due to changing regulations and standards:

Regulatory compliance is one of the financial industry's biggest challenges. According to a Thomson Reuters report ^[3],62 percent of financial institutions expect to increase their budget and allot more resources to compliance compared to a decade ago. This is partly due to the repercussions of the 2008 financial crisis, which prompted governments to revise their policies. 

Financial institutions face the added challenge of ever-changing compliance regulations and taking measures to ensure that their systems and processes can keep up with such changes.

Manual errors due to paper-based processes:

Given that lending institutions deal with large volumes of data, a manual approach to data entry and document review to errors or repetitive entries. Moreover, logging applications into separate systems can make it challenging to get a holistic view of the lender’s portfolio.

Lengthy workflows delaying loan approvals and disbursements

The loan application process can take several weeks or months, especially if there’s a constant back-and-forth between lenders and borrowers. Moreover, manual tasks that are part of the loan origination process can also cause delays in loan approvals and disbursements.

Data inconsistency caused by disparate systems

Lenders that use separate systems to process loans may find it difficult to access all the pertinent information required to accurately assess the borrower.

Difficulty in integrating with existing core banking systems

Not all loan origination processes are built the same, and while they may share some functionalities, only some solutions will integrate seamlessly with your existing systems. 

Lack of transparency in the loan origination process:

The lack of an integrated solution and centralized systems may lead to a lack of transparency in the LOP. Monitoring opportunities and sales activities manually can also create disparate systems.

Loan exceptions that require manual intervention

Deviations in the process, such as loan exceptions or loans that don’t follow prescribed lending policies, can cause workflow disruptions that can affect your organization, adversely influence your loan portfolio, and increase the risk of credit risk. 

Factors that may hamper your loan origination workflow, commonly caused by a poorly implemented loan origination process, include loan application abandonments, missed cross-selling opportunities, an overworked workforce, compliance issues, and hidden costs and losses.

Operational inefficiency due to disparate lending platforms

The problem of operational inefficiencies can be viewed from three perspectives, according to Fiserv: borrower, lender, and technology. Using disparate systems can make it more difficult for lenders and borrowers to access all relevant information needed to apply for and process a loan efficiently. For lenders, using separate platforms can entail training their staff to use multiple systems or resort to manual processes to manage accounts, thereby increasing operational inefficiency. 

Data can get siloed, which may affect operations and implementation. Furthermore, using separate systems can make it more challenging for organizations to meet regulatory mandates.

What are the benefits of automated loan origination systems?

An automated loan origination system offers several benefits for both lenders and borrowers. 

Reduce human intervention

You can automate manual tasks, such as checking documents or assessing a borrower’s capabilities and financial data during the pre-application process, freeing up employees and allowing them to focus on more pressing tasks. 

Reduce complexity and speed funding

Automation allows you to streamline your loan origination process by eliminating redundancies, automating repetitive tasks, and minimizing errors, letting you speed up the loan application process and disbursements.

Accurately score credit risk control

Automation helps you make better data-driven decisions, by giving you quick access to up-to-date and accurate information. It also lets you access automated risk assessment capabilities for more calculated assessments.

Improve employee satisfaction

Automation can lighten the workload of your employees, allowing them to make data-driven decisions faster, and boosting their productivity and overall satisfaction.

Reduce complexity and errors

Automation simplifies the loan origination process and reduces the room for error. By managing every step of the LOP, you can closely monitor applications and accurately review documents to minimize errors.

Ensure regulatory compliance

Compliance is one of the biggest challenges lenders face, given that they’re prone to change. Adopting an automated system can help you meet regulatory requirements by enhancing transparency through streamlined, less complex processes. Furthermore, such systems can be configured to adapt to ever-evolving legislation.

Increase visibility

The LOP has several touchpoints throughout the entire process and often entails using separate systems for different loans or financial products. Automation can give a more holistic view of the process and pave the way for increased end-to-end visibility.

Increase efficiency

Embracing automation can improve operational efficiency and eliminate redundant and time-consuming processes. It can also facilitate more accurate processes that give borrowers a better experience while allowing lenders to process and approve more loans to drive revenue.

Enhance customer satisfaction 

Automation allows you to deliver more personalized experiences to your clients. For instance, incorporating an automated onboarding process makes it easier for borrowers to apply for a loan.

Well-defined workflows

Well-defined workflows help prevent deviations and adversely impact your loan origination process.

Accurate decision-making

Automated systems can analyze large amounts of data, leading to accurate decision-making.

Improve productivity

Because automation reduces the need for human intervention, your employees can provide quicker, more high-quality services.

Who can benefit from automating the loan origination workflow process and how?

Various individuals and teams from lending organizations, as well as borrowers themselves, can benefit from an automated loan origination process. These include the following:

Lenders as in Banks:

Incorporating automated loan origination workflows reduce the time to process documents by as much as 80 percent. Furthermore, automation capabilities can reduce the time needed to make decisions, thereby making the LOP more efficient. 

Lastly, because loan origination automation minimizes or eliminates the need for manual tasks, lenders can instead focus on more complex tasks like identifying potential fraud cases while allowing them to meet compliance regulations or deadlines. For instance, if a lender wants to speed up and improve the efficiency of the LOP while complying with industry regulations, then loan automation can be beneficial.

Loan officers:

Loan officers can leverage automated loan origination processes to access risk assessment capabilities and decision-making processes.

Moreover, because automation can reduce errors in the LOP, loan officers can get better accuracy while providing borrowers with better transparency. These, in turn, allow them to quickly make more accurate credit-related decisions quickly. 

Borrowers:

Borrowers who want access to quick and seamless loan applications can also benefit from loan origination automation. Aside from speeding up the entire process, it provides greater transparency to borrowers through real-time updates, thus improving customer experiences.

Underwriters:

Manual or paper-based underwriting practices are time-consuming and susceptible to inconsistencies and inaccuracies. Automation gives underwriters access to robust risk assessment tools and more accurate data, allowing them to make quicker, more informed decisions when assessing loan applications. Furthermore, automation can provide them with insights from data and analytics, enabling lenders to underwrite certain risks.

Compliance Officer:

Lending institutions face the challenge of keeping up with changing regulatory requirements. With automation, compliance teams can access real-time data and monitoring tools that they can use to ensure that their organization adheres to regulatory requirements.

IT departments:

Automation can streamline the process by integrating LOP with existing systems. This, in turn, reduces reliance on IT departments, allowing your teams to become more independent and freeing up your IT department so that they can focus on other tasks.

Risk management officer:

Automation can incorporate better risk management capabilities, improved accuracy, and faster turnaround time. It can give your risk team real-time access to borrower data and a more streamlined decision-making process.

Bank legal team:

Legal teams who want to automate compliance checks, simplify contract reviews and approval processes, and have real-time access to borrower data can benefit from an automated loan origination workflow. It can help legal teams meet compliance requirements more efficiently with better accuracy, efficiency, and faster turnaround times.

Account management team:

Account teams who want to automate loan servicing processes and streamline account management can benefit from automation as it enables them to access increased efficiency, improved accuracy, optimized operations, and provide better customer experiences. 

Customer management teams:

An automated workflow can provide customer management teams with robust real-time solutions for borrower communications and customer service. Through automation, such teams can offer enhanced customer experiences, increase efficiency and accuracy, and speed up turnaround times.

Credit officer:

Automation gives credit teams access to real-time data, allowing them to make better decisions faster while helping them reduce risks and offer faster turnaround times. 

How to automate every stage of the loan origination process?

Every stage of the LOP comes with specific challenges. While automating your LOP in one sweep may seem like a good idea, there may be better solutions for some organizations. The key here is to apply automation to your LOP gradually. 

Through paced adoption, you are able to reduce financial and operational strain while still enjoying automation capabilities. This section explores how you can implement automation for each step and the value it brings.

Stage 1: Automate Pre-approval in LOP

The pre-approval stage requires lenders to collect necessary financial data from borrowers. It’s a time-consuming and inconvenient process involving much paperwork and documentation. It’s also likely that because of the large volume of data that lenders are working with, this stage may be prone to data inaccuracies. 

Automated LOP enables lenders to check if the documents meet their pre-approved criteria or if the applicant needs to submit further documentation. For example, using an application program interface (API) can make it easier to collect financial data and integrate it with a customer’s existing loan application record. Automation can also help perform basic KYC to aid with compliance. 

A low-code automation platform like Kissflow is capable of simplifying process automation, as well as approvals for rewriting loans.

Stage 2: Automating Application submission stage in LOP

With loan origination automation, you can provide applicants with a way to apply for a loan online (self-service) and upload the required documents. Meanwhile, lenders can scan the uploaded documents to look for specific information. Aside from standardizing this particular process, it reduces the need for manual human intervention.

Stage 3: Automating Loan application processing

Loan application processing is an important step that allows lenders to verify whether the documents are accurate and up-to-date or not. Using a loan origination system lets lenders automatically check if the documents are complete, meet their pre-approved criteria, and comply with regulations, eliminating the need to review every document manually. 

Kissflow’s low-code automation platform simplifies the loan origination process, through automated address verification, credit check, approvals, and document verification.

Stage 4: Automating Underwriting

Underwriting involves evaluating an applicant's riskiness, credit score, and loan potential. Automation can leverage big data, predictive analytics, and machine learning algorithms to analyze large quantities of data, identify patterns, and make informed predictions based on customer attributes. Automating this process lets you scan financial documents to collect relevant information and derive data-driven insights to make better decisions.

Stage 5: Automating Credit Decisioning 

Once you’ve made a credit decision, you can use a low-code automation platform like Kissflow to generate automated responses. Such scalable solutions allow you to adjust the applicant’s loan amount or interest rate based on your criteria. 

While automation may not apply to every lending product in your arsenal, you can still use it to transfer relatively easy cases to algorithms, allowing your teams to focus on more complex assignments.

Stage 6: Automating Quality check operations

Typically, a final quality check is carried out prior to loan issuing, to ensure everything is in place. With automation, you can speed up this process while ensuring that the application meets your regulations and compliance requirements. 

Some applications may require revisions. Kissflow can also help issue approvals for rewriting loans.

Stage 7: Automating Disbursement of loan process

The final step in loan issuance requires lenders to communicate the decision to borrowers on time. 

Aside from letting you release funds quickly, you can use Kissflow to provide your borrowers with relevant communication, such as notifications about when their funds will arrive and whether their application has been approved.

Furthermore, adopting a low-code platform for banking automates and simplifies how lending institutions communicate with their borrowers through reminder emails for EMIs and reminders for nonpayment, dues, and penalties. Moreover, it can send event-based mailers and alerts, such as thank-you emails.

How does automating loan origination improve operational efficiency?

Legislative reforms have made it challenging for financial institutions to achieve operational efficiency. This is further hampered by redundant or incompatible LOP systems that pave the way for disjointed processes and disparate systems. There has since been a growing need for such institutions to reevaluate their processes and lending platforms to continue meeting regulatory requirements and optimize their overall lending operations. 

The key to achieving operational efficiency is to use a unified platform for all loan origination processes and adopt a cloud-based approach. These solutions provide a more holistic approach to LOPs and can enhance measures for greater transparency and compliance.

Transform your loan origination process with low-code automation

Adopting low-code automation solutions enables lending institutions to optimize their loan origination process. Employing traditional solutions can be a time-consuming process that can take months. Meanwhile, low-code platforms provide organizations with a faster, more cost-effective way to automate their loan origination process. Other benefits of low-code platforms include speedier time-to-market, customizable decision-making rules, custom components to scale operations, vast integrations, and empowering citizen developers. 

Low-code platforms enable users to build their applications to automate lending operations. A low-code platform like Kissflow allows users to become citizen developers and create custom solutions to automate, standardize, and streamline business operations. 

Discover how Kissflow’s unified low-code platform for banking can help your organization build and deploy an automated loan origination process.

Key takeaways:

• The formalized loan origination process is a complex and time-consuming endeavor that can hamper loan applications and prevent financial institutions from gaining a competitive edge in light of growing competition from FinTech companies.
• Loan origination automation addresses common challenges such as regulatory compliance, lengthy workflow, human error, data inconsistency, and lack of transparency. It also mitigates the risk of deviated workflows affecting your organization’s overall efficiency. 
• Automation can benefit different individuals and teams from lending institutions, such as legal and risk teams, underwriters, and loan officers, as well as their clients.
• An automated loan origination system allows organizations to access benefits such as more accurate decision-making, better transparency, improved employee satisfaction and productivity, and streamlined operations. 
• The entire LOP, from pre-approval to loan disbursement, can be automated using a unified low-code platform like Kissflow.
• A unified platform for all loan origination processes allows for more streamlined operations that can result in enhanced operational efficiency.