What an LOS Is, and How It Benefits CFIs

A loan origination system automates and manages the lending process to address common challenges.

You might also like this whitepaper on simplifying ROI for lending technology 

DOWNLOAD

Definition of LOS

A loan origination system automates, manages

A loan origination system (LOS) has become a common banking buzzword among banks and credit unions in recent years. However, the term LOS can have different meanings to bankers across the industry.

For some, an LOS is a compilation of software solutions that automate commercial loan origination workflows at a financial institution. For others, it is a magical tool that leads to growth and improved borrower experience. Some might say it is merely a buzzword. But with the lending landscape growing increasingly competitive and the loan process as frustrating and time-consuming as ever, it’s important to understand what a loan origination system is. It’s also important to understand how an LOS may be able to help your bank or credit union.

An LOS is defined as a system that automates and manages the end-to-end steps in the loan process – from the application, through underwriting, approval, documentation, pricing, funding, and administration. While these steps may vary at each institution, every bank or credit union works through a similar process to approve loans and maintain a lending relationship.

Lending without an LOS

Without a system that organizes and automates the entire life of a loan, lenders rely on spreadsheets, printers, emails, calls, and other manual processes. This often results in errors, version-control issues, and inconsistent decisions. In addition, manually performing tasks results in entering the same data repeatedly. Staff spent time on clerical tasks instead of business development.

Benefits of Loan Origination Systems

An LOS meets 4 challenges of banks, CUs

Several challenges tied to booking business loans typically drive a financial institution’s decision to use a loan management system, according to research firm Aite Group. In its report, “Lender’s Perspectives: Commercial Loan Origination Automation,” Aite identified the following four market trends as drivers of lenders’ “appetite for automation”:

 

Competitive demands

The increase in demand for credit by commercial and industrial entities since the financial crisis has driven lenders’ need to reduce time required to field opportunities, then underwrite and document them, according to Aite. Speed also enables scale – an increase in throughput without increasing headcount: “After all, the faster underwriters and relationship managers can process deals, the more deals they can process in a given period,” Aite noted.

Customer and member demands

Principals and decision-makers of commercial borrowers expect similar convenience when borrowing as they receive when using other services (think Amazon and Uber). They seek a digital experience offering simplicity and speed when looking for a loan.

Lending participants’ demands

Those involved in the lending process (lenders or business relationship managers, underwriters, line-of-business managers, credit authorities, and back-office personnel) “have also come to demand more convenient and digitized processes for tasks they complete across the loan life cycle,” Aite said.

Regulatory demands

Demands related to the allowance for loan and lease losses (ALLL) or the current expected credit loss (CECL), as well as for Dodd-Frank stress testing and other regulatory regimes are requiring lenders to justify and document their risks and decisions in detail. Automation makes it easier and more efficient for lenders to meet these requirements.

 

Learn about the top commercial LOS providers.
Product Features — Client Service — Cost Value

Build or Partner?

Internal vs. third-party loan origination systems

Once a bank or credit union understands the need for an LOS, it has two choices when it comes to acquiring access to a loan origination system: developing it internally or using a third-party vendor.

Three factors to consider when making the choice between developing an LOS internally or using a third-party loan origination system are:

  • Staffing. Some larger financial institutions with substantial IT staffs can build and maintain a new commercial loan origination system on top of competing needs related to cybersecurity, fraud, and other priorities. Meanwhile, many banks or credit unions find it more cost-effective in terms of resources to use a third-party solution that is already developed.
  • Compliance. Another factor to consider in the “build vs. buy” argument is that any loan origination system must comply with current regulations and industry standards. Regulations, in particular, frequently change, so any LOS should be able to make adjustments related to shifts in regulatory or best-practice requirements in a timely fashion. Some third-party vendors are regulated by the Federal Financial Institutions Examinations Council (FFIEC).
  • Implementation speed. Developing a commercial LOS takes time and resources. Some financial institution executives are eager for LOS implementation once the decision is made to move away from paper-based or Excel-based processes. A software LOS vendor has typically already implemented its solution at many other banks or credit unions, so the provider has streamlined implementation. In addition, a third-party LOS has the advantage of already having gone through the product development lifecycle. The vendor has collected and corrected bugs in multiple phases before rolling out the solution to the market.
How to Select an LOS

Choosing a loan origination system

The initial step in selecting a loan origination system is to consider the goals the institution looks to achieve with the system. For many institutions, this involves improving earnings, enhancing the borrower or member experience, and propelling portfolio growth. The best commercial lending software is an LOS that can handle the entire life-of-loan process.

“The best commercial lending software is an LOS that can handle the entire life-of-loan process.”

Life-of-loan LOS

An effective LOS will provide end-to-end digital loan processing. This is critical for efficiency, consistency, and scalability. Here’s why, along with the key features of an LOS:

First, when staff are freed from manual tasks like data entry and tracking down documents or signatures, they can use more of their valuable time to build relationships with borrowers or members. Similarly, credit analysts can spend more time analyzing complex credits when they don’t have to re-enter financial data from an application to calculate needed data such as the debt service coverage ratio and global cash flow, or to generate a credit approval memo.

Second, commercial loan origination software that incorporates components ranging from a digital loan application to electronic signature enables financial institutions to meet borrowers where they are and when borrowers are ready – whether at home or work, or whether during the bank or credit union’s operating hours or during hours or days it is closed.

Finally, credit risk analysis software that is part of an end-to-end LOS allows credit staff to take advantage of automated loan decisioning, loan management system workflows, and financial spreading. These save even more time. As a result, financial institutions that automate these steps can handle more loans without adding staff.

Flexibility, Consistency

One platform for multiple loan types

There are different types of loan origination systems, depending on the loan products that a particular bank or credit union offers. For example, a financial institution could use a commercial loan origination system, a consumer loan origination system, and a mortgage origination system. Each system used to originate and decision these various loan types is a type of loan origination software, with tweaks to accommodate various compliance and process differences.

One consideration when selecting a loan processing software is whether the LOS for commercial loans can “talk” to other systems for these various loan types. An LOS used for business loans that is on the same platform as one for consumer loans makes it easier to receive a comprehensive view of the borrower. Similarly, an LOS that can evaluate commercial loans, Small Business Administration (SBA) loans, and personal loans on a single platform makes it easy to share information across the portfolio. In other words, lenders and credit analysts can save time by not having to log in and out of various systems.

Furthermore, when able to access the extensive data they possess across the loan types or even across several areas of the institution, financial institutions can generate better insight into:

  • portfolio health
  • enterprise-level risk
  • growth opportunities
  • the overall financial health of the bank or credit union

Drillable dashboards and ready-to-use reports enable staff and executives to drive smarter, data-based decisions.

Overall, an LOS is an effective tool for banks and credit unions looking to organize and enhance their current lending processes from the first borrower interaction all the way through closing and funding. With improved digital lending processes, financial institutions can provide the high level of customer service they and their borrowers expect – with an even faster turnaround time. This customer or member experience and the efficiencies gained with a loan origination system give financial institutions a leg up on the competition.

Stay updated on lending best practices.
keep me informed View Sageworks Solution Video
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

Full Bio

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.

Make Big Things Happen.

 

Looking for Banker’s Toolbox? You are in the Right Place!

Banker’s Toolbox is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to Banker’s Toolbox Community Online.

Make yourself at home!