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.

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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.

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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.

About the Author

Mary Ellen Biery

Senior Writer and Content Specialist
Mary Ellen Biery is Senior Staff Writer & Content Specialist 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

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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