Synopsis: A loan origination system manages the entire lending process, from origination through distribution. Read along to understand more about how it drives value to a lender.

Giving out loans should be easy, but the traditional way of doing it is often a mess! Since most people prefer to do things online, lenders need a digital loan origination system to stay in business.

The market for loan origination software was valued at US$ 3.8 million in 2020 and is anticipated to increase to US$ 6.2 million by the end of 2026 at a CAGR of roughly 12.88%.

The goal of Loan Origination Software (LOS) is to offer mobile lending or credit services to customers. Users now desire to use the banking service while they are on the road due to the changing socioeconomic landscape and the emergence of digital platforms. Creating, underwriting, completing, and recording contracts for securities companies, credit unions, governmental entities, and individual lenders are just a few of the lending tasks that this software automates. 

The loan creation software is mostly utilized by institutions, including banks, credit unions, mortgage lenders, mortgage brokers, and others. Continue reading as we discuss more about a loan-originating system, its function, and its importance. 

What is a Loan Origination System (LOS)?

Loan origination is the process through which a borrower applies for a loan, and a lender either approves or rejects the application. The origination procedure involves every step, from filling out an application to getting money or having the application turned down. The process also varies according to the different types of loans. For instance, the application process for personal loans and home loans are distinct from one another. In such a situation, a proper LOS must be established to boost productivity and profitability.

The LOS software is used to process loan applications and manage end-to-end loan transactions. The system may incorporate several tools, including document management and compliance tools, pricing, and eligibility engines. The present lending ecosystem operates on a hybrid borrowing model that incorporates various elements, such as CRM, document production, compliance and third-party vendor integrations, to improve client satisfaction and engagement.  

A LOS controls the costs and requirements for each loan as well as the paperwork required for underwriting and closing. It also acts as a link between third-party data/document exchange systems and vendors to ensure compliance with industry standards. 

Furthermore, due to the introduction of cloud-based loan origination software, lenders were able to abandon outdated solutions for enrollment, which dramatically increased the loss of leads and, consequently, the loss of revenue.

Stages of a Loan Origination Process

A typical loan’s life cycle includes everything from submitting an application to receiving the funds. It has five important steps, which are:

  • Loan Application: This includes getting information from applicants and helping them fill out the loan application.
  • Loan Processing: This includes gathering and verifying the applicant’s information.
  • Loan Underwriting: This is the process through which the lender decides if the loan is a good risk and whether or not to approve it.
  • Loan Disbursal: This is the final step, wherein the loan is paid out after the last details are checked and completed.
  • Loan Servicing:  This includes sending reminders and making sure the loan is paid back on time, among other things.

How to Select a LOS?

When choosing a loan origination system, the first step is to think about what the institution wants to do with the system. For many institutions, this means making more money, making the experience of borrowers or members better, and growing their portfolios.

Also, it’s important not to underestimate how hard the LOS conversion will be. When a full system gap assessment isn’t available, hearing about the real experiences of several active users can help provide feedback. Even so, it’s important to ask for detailed information to understand the customer’s experience. Write down the details, and then use the majority of the information to help you make a decision.

Furthermore, the best software for commercial lending is a LOS that can handle the whole process of a loan’s life. 

1. Internal vs Third-Party LOS

Once a financial institution or credit union realizes it needs a LOS to simplify a loan’s lifecycle, it has two options for getting one: the organization can build it itself or use a third-party vendor. 

Although all software companies will say their LOS software works well with other tech companies, it’s important to do your research and make sure those claims are true. Your LOS must not only connect to other systems, but preferably, it should do so in a way that allows for dual payloads.

A few factors to consider while choosing between developing a LOS internally or using a third party are:

2. Compliance

In the debate of whether to build a LOS or buy one, it’s important to remember that any loan origination system must meet current rules and industry standards. Regulations, in particular, change a lot, so any LOS should be able to make changes quickly to keep up with changes in best practices or regulations. The Federal Financial Institutions Examinations Council (FFIEC) keeps an eye on some third-party vendors to prevent fraud and malpractice.

3. Staffing

Larger financial institutions with significant IT staff may be able to design and operate a new commercial loan origination system while also addressing competing objectives such as cybersecurity, fraud, and other issues. On the other hand, a lot of banks or credit unions find that using an existing third-party solution is more cost-efficient.

4. Implementation

Creating a commercial LOS takes time and money, but most executives in financial institutions can’t wait to get rid of paper-based or Excel-based processes and start using LOS. Furthermore, the LOS implementation process is usually streamlined since the software vendor has already implemented their solution at numerous other banks or credit unions. 

A third-party LOS also has the benefit of having already been through the product development life cycle because before releasing the product to the market, the vendor has already identified and fixed issues over several stages.

Final Words

LOS is a useful tool for banks and credit unions that helps organize and improve their lending processes – from the first time they talk to a borrower to the time they close and get paid. With better digital lending processes, banks can provide enhanced customer service that their borrowers expect, and they can do it at a rapid pace. This improved customer experience and the efficiency gained from a LOS give financial institutions an edge over their competitors.