7 Stages in Loan Origination
The First stage of Lending/Financial services is Known as Loan Origination process. The most important & critical stage in complete Loan servicing. The Finance Industry is now shifting its focus on Customer engagement & Satisfaction with the elements of design & delivery that fulfils customers’ expectations first.
For almost every lender the definition of the term Loan origination is different – where it starts, the different stages within the process and where it ends. Every Loan type will have a different approval process that can be manual or automatic. Lenders have their “secret sauce” when it comes to Loan Origination that they never want to share as Loan origination is what makes Companies stand out from their competition. Loan Origination System is responsible for managing everything from pre-qualification to the approval of funding the loan.
Below are the stages that are critical components of Loan Origination process :
1) Pre-Qualification Process :
This is the first step in the Loan origination process. At this stage, the potential borrower will receive a list of items they need to submit to the lender to get a loan. This may include :
• ID Proof / Address proof: Voter ID, AADHAR, PAN CARD
• Current Employment Information including Salary slip
• Credit Score
• Bank statement & Previous Loan Statement
Once this information is submitted to the lending company, Lender reviews the documents and a pre-approval is made, allowing the borrower to continue in the process to get a loan.
2) Loan Application :
This is the second stage of the loan origination process. In this stage, the borrower completes the loan application. Sometimes this application can be paper-based, but today lenders are shifting towards an electronic version that makes this stage Paperless. New technologies allow completing the application online through website & mobile app, and collected data can be tailored to specific loan products.
3) Application Processing :
At this stage, the application is received by the credit department and the first step done by the department is to review it for accuracy, genuine & Completeness. If all the required fields are not completed, the application will be returned to the borrower or the credit analyst and they will reach out the borrower to procure the missing information.
Lenders use LOAN ORIGINATION SYSTEM (LOS) to know the creditworthiness of the borrowers. A good LOS will help a lender setup workflows to process a loan. It can automatically flag files with missing required fields, return it to the borrowers and notify sales/Credit department to rework. Depending on the organization & product, exception processing might be a part of this stage.
4) Underwriting Process :
When an application is totally completed, the underwriting process begins. Now Lender checks the application taking a variety of components into account: credit score, risk scores, and many lenders generate their own unique criteria for scoring that can be unique to their business or industry. Nowadays, this process is fully automated with the help of a rule engine & API integrations with Credit scoring engine’s (CIBIL, EXPERIAN etc. ) in LOS. In a rule engine, the lender can load underwriting guidelines specific to products.
5) Credit Decision
Depending on the results from the underwriting process, an application will be approved, denied or sent back to the originator for additional information. If certain criteria’s don’t match according to the rule engine set in the system, there can be an automatic change in the parameters, such as reduced loan amount or different interest rates.
6) Quality Check
Since lending is highly regulated, the quality check stage of the loan origination process is critical to lenders. The application is sent to the quality control team, that analyze critical variables against internal and external rules and regulations. This is the last look at the application before it goes to funding.
7) Loan Funding
Most loans fund shortly after the loan documents are signed. Second mortgage loans, Business loans, Loan against property and lines of credit may require additional time for legal and compliance reasons. LOS can track funding and ensure that all necessary documents are executed before or together with funding.
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