A guide to automated loan underwriting

Takeaways

• LoanPro’s modern lending and credit platform has pre-built integrations with partners who provide automated loan underwriting for our 600+ customers. The value of this process is outlined in this blog post.
• Transitioning from manual to automated loan underwriting is crucial for scalability, reducing human error, and cutting operational costs.
• Automated underwriting systems can significantly enhance the speed and accuracy of loan approvals, making them imperative in today’s fast-paced lending environment.
• The shift towards automated loan underwriting is inevitable and promises substantial ROI.
• Lenders should identify bottlenecks and introduce automation in phases to improve processes for document management, communication, and risk assessment.
• Some lenders report a 70% reduction in time and a 40% decrease in costs after shifting from manual to automated underwriting.
• The shift towards automated loan underwriting is inevitable and promises substantial ROI.

Challenges with manual loan underwriting

In the world of lending, the transition from traditional methods to automated processes isn’t just a matter of convenience; it’s becoming a necessity for scalability and efficiency. Many lenders still grapple with manual underwriting and loan approval, a painstaking process fraught with delays and inefficiencies that often require sifting through pay stubs and employment history manually. A recent poll by Moody Analytics highlights this pain point vividly: 56% of financial institutions reported that manual data collection and the ensuing back-and-forth with borrowers represents their biggest challenge in initiating the loan process.

These manual underwriting processes aren’t just slow. They’re also prone to human errors and scalability issues. As fintechs and financial institutions strive to expand their portfolios, they often hit the wall of operational capacity—manual methods simply can’t keep up with increasing demand without corresponding increases in errors or servicing costs. To overcome these challenges, a strategic and thoughtful approach to integrating automation into the loan underwriting process is crucial.

Modernizing loan underwriting isn’t just an upgrade; it’s a fundamental rethinking of old processes to meet new demands. An automated system holds the key to solving these issues, providing a seamless, scalable, and more accurate underwriting process.

Strategies for underwriting process automation

Incorporating automation into the underwriting process can take many forms, depending on the specific needs and readiness of your lending business. A great place to start is by evaluating your current lending processes to identify the most significant bottlenecks and areas with the highest potential for immediate impact. Once you know where to begin, you can strategically implement automation in phases, starting perhaps with the automation of basic loan application information.

To aid in your evaluation, here are three core areas where automation can significantly enhance your underwriting process, along with examples of specific actions you can take:

Document digitization management

Automated electronic document management systems

You can implement robust automated electronic document management systems to streamline how you collect essential data like income verification or pay stubs, bank statements, and personal identification. These systems play a pivotal role in the loan underwriting process by reducing the manual processing time, thus decreasing human error and improving efficiency.

Intelligent Document Processing (IDP)

Deploy an IDP system that uses advanced artificial intelligence to extract, validate, and classify financial data, accelerating the document verification process. This automation is crucial in handling the applicant’s financial history and other required documentation for loans, ensuring compliance with regulatory requirements and enhancing the overall customer experience.

Workflow automation and enhanced customer interaction

Robotic Process Automation (RPA)

Use RPA to automate repetitive tasks within the lending processes, such as data entry for loan applications and compliance checks. This reduces manual effort and error, ensuring a smoother loan application process and enhancing loan officer efficiency. Automated systems like RPA help in managing risk factors more effectively, leading to a more reliable decision making process and loan approvals.

Automated communications tools

Integrate tools that update customers in real-time about their loan applications’ status via various contact methods, significantly improving your customer experience by keeping potential borrowers informed throughout the loan process.

Advanced risk assessment with machine learning

Predictive analytics

Employ machine learning algorithms to analyze historical data and predict the borrower’s risk level, helping you make more informed lending decisions. This advanced risk assessment process is essential for financial institutions to manage their portfolios effectively and reduce costs associated with bad loans. An automated underwriting system can quickly pay for itself if that improved accuracy lowers your default rate.

Automated credit decisioning

Use AI algorithms for automated credit decisioning, allowing lenders to quickly assess a potential borrower’s credit scores, debt-to-income ratios, and employment history. This process ensures faster and more accurate credit assessments, automatically approving loans based on set criteria, and thus reducing the reliance on human underwriters for such decisions.

By understanding the best starting point and focusing on these key areas, you can gradually integrate automation into your operations. This incremental approach not only minimizes disruption but also allows for continuous improvement and adaptation as you learn from each phase of implementation. With the right strategy, automation can power new levels of efficiency, accuracy, and customer satisfaction in your loan underwriting processes.

The consequences of automated underwriting systems

Lenders who have moved to automation report significant improvements in speed and accuracy of their processes. For instance, a customer of LoanPro was able to cut their average underwriting time by 70% while also reducing processing costs by 40% by implementing an automation software.

Despite the clear advantages, some lending institutions express concerns about data integrity and compliance risks associated with automation. It’s important to choose solutions that are not only effective but also compliant with the latest regulations, ensuring that the automation enhances rather than compromises the integrity of the underwriting process.

For lenders looking to adopt automated underwriting, the first step is to evaluate the available technologies. Setting realistic goals, identifying process bottlenecks, and selecting the right technology partner are crucial steps in a successful implementation.

The future is automated

The potential ROI from automated underwriting is clear—improved operational efficiency, increased customer satisfaction, and the ability to grow and scale more effectively. As the financial industry continues to evolve, the shift towards automation is not just beneficial but inevitable. Lenders ready to make this move should consider an underwriting software like Oscilar, GDS Link, Anovaa, Amount, and others that are designed to streamline loan origination and the lending process. The future of lending is automated, and the time to start transitioning is now.