Loan Origination Processes and Challenges Part 1 – Consumer Loans

Note: The loan origination process is often a complex process requiring numerous handoffs between front and back office processes. The process also differs somewhat by loan type. Rather than provide a broader generalization of the end-to-end value chain, I have decided it best to split the blog into three parts – Consumer Loans, Mortgage Loans, and Commercial Loans.

Consumer loans should be one of the simpler loan origination processes. For some financial institutions, this is often the case for most secured and unsecured loans that do not involve real estate as collateral (HELOCs, HELs). However, other institutions seem to struggle with the process to originate any type of consumer loan. By their very nature, consumer loans should be a highly automated process.

Yet, many institutions struggle to fully automate this process. Consumers often expect banks and credit unions to process a loan request quickly and easily. A key reason for this expectation comes from the automobile purchase process. When a consumer buys a new or used vehicle from a reputable dealer, they often have a loan approval within a very short window. Yet, if that consumer went directly to their financial institution, it could take 24 to 48 hours before they have an answer.

Indirect Lenders vs Direct Lenders

The time differential between many indirect loans and direct loans is largely the result of automated versus manual processes. Indirect lenders need to make decisions quickly in order to secure a deal with what may not be their own direct customer. To remain competitive in the indirect market, these lenders have deployed automation that takes pertinent information directly from a loan application and applies it to credit bureaus and automated underwriting systems to provide an answer to the consumer as quickly as possible. Some community banks and credit unions have similar capabilities on direct consumer loans while others lack this capability.

For example, I recently had a wonderful experience applying for a car loan earlier this year at one of my banks. This particular institution is a savings bank and has developed capabilities that I believe are ideal in the consumer lending environment. I first went to their website and signed into my account. From there, I clicked on a link to apply for a loan. Their home banking application walked me through the loan application process in a simple manner. Before I even completed a full loan application, their system was able to provide me with a maximum loan amount and rate that I would qualify for based on income and credit score.

As I continued filling out the loan application, I had a few questions that I needed to have answered. Therefore, I contacted their call center and the agent was able to retrieve my loan application where I left off, answer my questions, and then continue to walk me through the rest of the loan process.

In less than 30 minutes time, I had filled out an application, had an approval amount and rate, electronically signed a note, and had a draft available for my dealer to fax this bank for funding of the loan.

Utilizing as much automation as possible, I was able to attain a loan for a new vehicle in a short period of time with minimal pain. As a process efficiency consultant, this process was about as clean as possible and followed all of the best practices Ceto often presents to its clients as an ideal solution.

The Bottlenecks of a Manual Loan Process

Unfortunately, there are still plenty of organizations that continue to have highly manual consumer loan origination processes. Consumers are required to go to a branch, either fill out a loan application by hand or meet with branch personnel or a lender who enters their detailed loan information into a loan application on the loan system. The lender or branch person will also be required to pull credit from a credit bureau and use this information to either underwrite the loan themselves or provide the application and financial information to central underwriting.

Underwriting will then make a decision as to whether or not they are going to provide a loan to the customer or not. If the financial institution utilizes a central underwriting process, most groups suggest that they will have an answer by the next business day. Even when the lender is the underwriter, the lender may wait for a loan assistant or loan processor to validate some of the customer information before they render a decision.

Once a decision has been made to approve the consumer’s loan, then the loan application is sent to the document prep area who will reenter all of the application information including loan rates, terms, and other pertinent data into a loan documentation system where loan documents will be generated.

Most financial institutions will send a print file back to the branch where the loan originated for the loan to be printed and signed by the customer. Once the loan is signed, the loan is funded and depending on processes booked into the loan system that day or within a few days. In some cases, the document prep function may require a day to turn the documentation back around to the branch or lender. This is how a 30-minute process takes 2 days.

How to Provide a Better Loan Experience at Your Bank

Not every financial institution can afford the technology and automation that my savings bank deployed in my case. However, steps in the manual process can still be eliminated to reduce the origination process to a few hours from a few days.

For instance, rather than sending a loan application with rate and term information to a back office function, best practice organizations will allow the lender or branch personnel to input the loan information directly into the documentation system and create their own documents directly. For central underwriting shops, Service Level Agreements (SLAs) are introduced into the process to reduce the time an underwriter has by loan type. A new car loan might have an expected underwriting turnaround of 1 hour from the time information is received to the time an approval or denial is provided back to the lender.

Many institutions will utilize automated underwriting systems for most of the consumer loans they originate which often provide a decision within minutes rather than an hour. To speed the signatory process, banks are introducing the capability to provide loan applicants with the option of receiving loan documents for signature electronically.

Ultimately, financial institutions need to be able to provide consumer loan applicants with expectations as to when a decision will be made and then stick to providing those decisions and turnaround times within the window quoted. Not every consumer requires a 30 minute turnaround for a loan decision and note authorization. Most consumers that come to a branch or apply through online or call centers will be pleased to be provided with an expectation as to when the loan information will be provided to them.