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Lending & Credit Risk C&I Loans CRE Lending Credit Risk Management Loan
Origination System Loan Pricing Loan Review and Due Diligence Member Business
Lending Risk Ratings


WHAT BASIC FUNCTIONS SHOULD MY LOAN ORIGINATION SYSTEM (LOS) PERFORM?


Mary Ellen Biery
May 10, 2021
Read Time: 9 min
Print/PDF


FEATURES OF A COMMERCIAL LOS 

What basic functions should a loan origination system complete? What should an
LOS vendor provide? 


YOU MIGHT ALSO LIKE THIS AITE GROUP REPORT ON LOS VENDORS.

DOWNLOAD


TAKEAWAY 1

Know the features and functions of a loan origination system (LOS) if your
financial institution is shopping for one or upgrading.


TAKEAWAY 2

Process management features of a loan origination system help manage the
workflow, from analysis through closing.


TAKEAWAY 3

Aite Group assessed client references to evaluate vendors of loan origination
systems and important features.

Beyond Origination


UNDERSTAND THE ELEMENTS OF AN LOS

A loan origination system (LOS) should perform several basic functions to
automate and manage the end-to-end steps in the commercial loan process.
Providers of loan origination software representing good partners for a
financial institution also have specific features. Knowing these elements of an
LOS and an LOS vendor is critical for senior financial institution executives
either shopping for an LOS for the first time or considering an improvement to
their bank or credit union’s current business lending process.

While a financial institution often primarily focuses on securing software to
originate business loans, a commercial LOS provides scalability when it offers
integrated solutions on one platform to manage all stages of the life of the
loan. In addition to origination, the end-to-end software can manage the
following:

 * Business development, or pipeline development
 * Credit analysis and decisioning
 * Portfolio risk management
 * Allowance for loan and lease losses (ALLL) calculations or a fully compliance
   calculation under the current expected credit loss model, or CECL
 * Asset-liability management


BASIC FUNCTIONS OF A LOAN ORIGINATION SYSTEM 

When evaluating a loan origination system, lenders are rightly concerned with
three major areas:

 1. the customer or member experience
 2. sound lending practices
 3. efficiency

Therefore, commercial loan software will have features such as:

 * A business development component that helps the financial institution
   identify lending opportunities to better serve customers or members.
 * An online loan application that allows the borrower to complete it at their
   convenience, either at home, the office, or even in the branch with financial
   institution staff assistance.
 * The ability to automatically pull into the loan application
   current-customer/member information to streamline the application process and
   avoid repeated data entry or keying errors by lenders. For new customers or
   members, the solution provides one point of data entry and data flows
   automatically throughout the solution.
 * An application form that is dynamic, or responsive to the borrower’s answers
   to show which fields need to be completed next and what files must be
   provided.
 * A form that can handle multiple loan product types.

Workflow & Analysis


LOS PROCESS MANAGEMENT FEATURES

Lending process management is key to timely decisions. Thus, a critical function
of a bank or credit union’s commercial loan origination solution is that it
notifies individuals at key steps of the process, such as when the loan
application is complete or when all documents have been submitted. Without this,
staff must engage in back-and-forth emails or phone calls to check the status of
a loan. The workflow is constantly interrupted, and efficiency is lost.

The commercial loan origination solution also allows customers or members to
upload documents securely online without the risks of email or the inconvenience
of having to drop them off at a branch. This eliminates one of the most
time-consuming aspects of a manual lending process and allows the financial
institution to better track loan documents.


ANALYSIS FEATURES OF THE LOS

An LOS automates the spreading of financials from tax returns and financial
statements to expedite underwriting. This credit risk analysis should
incorporate custom metrics for the financial institution, real-time credit
scores imported, as well as a global debt-service coverage ratio when necessary.

Based on the borrower information and the institution’s standardized loan rating
system, including whatever customized factors and weightings are involved, the
LOS should then automatically generate a risk rating and related documentation.
The LOS’s automated loan pricing will reflect the financial institution’s credit
policies and profitability targets, taking into account not just the costs of
administering the loan and borrower risk but also the entire relationship.


LOS DECISIONING FEATURES

Another basic function of any financial institution’s lending system or
processes is generating consistent decisions. The features of an automated LOS
listed earlier contribute to consistency.


YOU MIGHT ALSO LIKE "LEADING A SUCCESSFUL SOFTWARE IMPLEMENTATION"

DOWNLOAD whitepaper

In addition, a loan origination system that includes automated decisioning
templates (customized to the institution’s credit policies) allows less complex
loans to be processed in an expedited but consistent manner. Underwriters are
then able to focus their efforts on loans with multiple borrowers or more
complex businesses that require additional analysis. It also improves the
efficiency of processing smaller-dollar loans from valuable customers.

Similarly, many financial institutions seek loan origination software that can
generate a credit memo based on a template that is auto-populated by the system
so lenders can avoid rekeying information. However, another important benefit is
that the loan committee receives consistent, presentation-quality credit memos
from loan to loan. The LOS templates, should, of course, allow for customization
by the institution.

 


ADMINISTRATIVE/CLOSING FEATURES OF AN LOS

Upon loan committee approval, a commercial loan origination system’s loan
administration automatically pushes the loan information into the legal loan
documents with the required formats and disclosures and makes them available for
electronic signature. This saves considerable time compared with data entry and
offers faster turnaround than using a document preparation company.

During the due diligence stage, a loan origination system sends out emails
listing which documents are required and providing a link to upload them
securely to an online portal. All documents for a relationship are stored in one
relationship document library for easier tracking, and notifications alert the
lending team of documents received.

 


PORTFOLIO MONITORING LOS FUNCTIONS

An LOS helps track compliance with covenants and document-filing requirements.
Indeed, an automated request for required documents is generated based on loan
terms (annually, for example) for each customer relationship (rather than for
each document). The LOS can also automatically generate annual loan reviews.


Best-in-Class LOS Vendors


FEATURES OF AN LOS PROVIDER

When research firm Aite Group used its proprietary framework to assess client
references for commercial loan origination system vendors in December 2019, it
rated the LOS providers based on four major components:

 * product features
 * client service
 * client strength
 * vendor stability

The product features that Aite noted were available among best-in-class LOS
vendors included:

 * a variety of functionalities in the LOS
 * support for customization
 * ease of implementation and integration

A loan origination system provider should offer “robust service and support to
provide real value to the clients,” according to Aite. It should deliver on its
promises and provide quality help and assistance after the sale.

Client strength was important from the perspective of the number and diversity
of the vendor’s customers, the vendor’s reputation among the clients, and
overall customer turnover. Finally, best-in-class vendors ranked highest among
their peers in terms of stability – years in business, profitability, growth
rate, and management reputation, and other factors.

Loan origination systems are consequential investments for financial
institutions. Ensuring an LOS has the critical features and functions is
important for improving the customer or member experience and streamlining the
lending process so that the institution will secure the desired return on the
software investment.


STAY UP TO DATE ON LOAN ORIGINATION SYSTEMS AND LENDING BEST PRACTICES.

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About the Author


MARY ELLEN BIERY

SENIOR WRITER AND CONTENT SPECIALIST

Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she
works with advisors and other experts to develop whitepapers, original research,
and other resources that help financial institutions drive growth and manage
risk. A former equities reporter for Dow Jones Newswires whose work has been
published in

Full Bio


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