Loan origination

I. Introduction to loan origination

Origination is the process of finding and vetting potential borrowers, both verifying their identities and ability to repay debts, and any other processes that are completed before money is disbursed to the borrower. The process varies from creditor to creditor, but remains a vital part of any credit provider’s strategies for acquisition, growth, and risk management.

II. Loan origination process and key components

The origination process varies significantly depending on the credit provider’s lending model. A traditional mortgage might take days or even weeks from the initial conversations to signing; online consumer loans can be approved in minutes. 

Steps in the loan origination process

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While the length and complexity of each step varies, most credit providers’ origination process follows the same general shape:

1. Customer acquisition. Acquisition is the process of attracting potential customers. Some lenders advertise and market their credit products, and others rely on referrals from business partners or other divisions of their company. (Automotive lenders, for example, might work with multiple dealerships or operate a car lot of their own.)
2. Application. Whether hosted on a website or filled out in person, a credit application is the tool credit providers use to get basic information about the applicant and their credit needs. They might ask for comprehensive information, or only request the basics and use third-party tools to gather the rest.
3. Data gathering. Once a borrower has submitted an application, the credit provider will use third-party tools to look up additional information and verify the borrower’s identity. This is done both to ensure the borrower is creditworthy as well as to comply with legal requirements.
4. Underwriting. Underwriting is the process of evaluating an applicant’s creditworthiness and the level of risk involved in extending credit. Using the data they’ve gathered from applicants and third-party data tools, they assess a borrower’s likelihood of repaying the debt. Their analysis may involve automated underwriting tools, or traditional methods like the 3 C’s of credit. Underwriting is a vital stage in the origination process, as it simultaneously prevents unnecessary credit losses and while keeping credit available to as many people as possible.
5. Credit decisioning. Credit decisioning uses the underwriting assessment to approve or deny applications. Some credit providers use binary decisioning models (approve or reject), while others use risk-based pricing tools that match applications with an appropriate product, credit limit, interest rate, or other terms. More granular pricing and product matchmaking require additional technical expertise but benefit both borrower and credit provider: Borrowers who might otherwise be rejected now have more financing options, and credit providers can expand their portfolios without overstepping their risk appetite.
6. Contract. Contracts for consumer credit products are subject to the Truth In Lending Act (TILA), and need to display specific calculated values like the APR and finance charge, as well as the terms and conditions related to repayment, fee structures, and required disclosures. Large contracts, like mortgages or auto loans, might involve negotiations back and forth between the borrower and credit provider, while smaller credit products like a credit card or personal loan might simply present terms to the borrower—take it or leave it.
7. Funding. This final step of the origination process, funding involves giving the borrower a good, service, money, or a tool to access money (such as a credit card). Once funding has been disbursed to the borrower, origination is complete and the borrower enters the servicing and collections stages of their account lifecycle.

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Note that while this process is common in loan and credit origination, these names and divisions between steps are not universal. Some creditors use dedicated personnel for each step, but others have the same group of agents managing both underwriting and decisioning. Data gathering might be fully completed before underwriting begins, or underwriters might request additional information as they assess an application. 

Documents required for loan origination

Credit applications require applicants to verify their identity and income to reduce credit risk and comply with Know Your Customer (KYC), Know Your Business (KYB), and Anti-Money Laundering (AML) regulations. This ensures that they are dealing with legitimate customers and not facilitating financial crimes.

Consumer applicants will likely need to provide personal information such as their full legal name, date of birth, Social Security number (SSN), address, employer information, and bank account information. Business applicants will need to provide similar information about their organization, including an Employer Identification Number (EIN).

Applicants may need to provide proof of their income, which usually includes recent pay stubs, a W-2 form, or an employment verification letter. Business applicants may be required to provide balance sheets and other recent financial information, including any outstanding debts. 

And this is certainly not an exhaustive list. Different lenders will have other requirements, and may even require different documentation for different credit products.

III. Enhancing loan origination efficiency and compliance

The credit and lending landscape continues to evolve, moving origination from manual processes towards automation, and from a generalized experience to a personalized one. Credit providers who modernize their operations often want to strike a balance between efficiency, borrower experience, and risk reduction.

Agent-assisted, self-service, and automation: Improving origination efficiency

At a traditional financial institution’s brick-and-mortar location, a borrower might fill out their credit application with the help of an agent. That kind of one-on-one assistance is of course costly, so the majority of credit providers have moved towards fully self-serviced applications as they’ve modernized and expanded their operations. 

With legacy application tools, creditors are left with this trade-off: Agent assistance is inefficient, but leaving applicants to their own devices delivers a sub-par experience that may lead them to abandon their application altogether. 

More modern application tools help bridge the gap, using automations and applicant-friendly UIs to make the application process easier, all while keeping their origination process efficient and scalable.

Compliance in the credit and loan origination process

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Several laws regulate creditor’s behavior during origination:

• Truth In Lending Act (TILA). TILA requires lenders to disclose specific account details (like the finance charge and APR) in loan contracts.
• Know Your Customer/Know Your Business (KYC/KYB) and Anti-Money Laundering (AML). These various underwriting regulations require lenders to verify applicants’ identities to prevent financial crimes.
• Equal Credit Opportunity Act (ECOA). Passed in 1974, ECOA prevents discrimination by credit providers and requires them to notify applicants of application status and reasons for denial.

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Staying compliant with these regulations can pose a logistical challenge to credit providers using manual processes and legacy technology. Modern credit platforms leverage automations and guardrails to make compliance a default part of the origination process.

LoanPro and origination

Between borrowers’ heightened expectations, ever-shifting regulatory requirements, and growing delinquency and default rates, it’s never been more important to support your lending and credit operation with a modern origination solution.

LoanPro’s origination suite has helped hundreds of lenders streamline and simplify their origination processes, reducing approval times while ensuring they remain compliant with their appetite for risk. With an API-first platform, end-to-end support, and a network of best-in-class partners, LoanPro offers a scalable origination solution that can accommodate virtually any class of credit product.

To see if LoanPro’s origination suite is the right match for your operation, reach out to us and schedule a demo. We’d love to show you how LoanPro can enhance your credit and loan origination.