What Is Loan Origination Software (LOS)?

First and foremost, what is loan origination software? LOS is a software that allows you to seamlessly manage and automate all the steps in the loan origination process, including:

• Application
• Document verification
• Credit approval
• Underwriting (automated in the system)
• PricingLoan document generation and signature
• Funding administration

And it plays a substantial role in the success of any financial institute and the digital transformation in banking.

According to anacademic journal published by Oxford Academy, it's because of technology like LOS that FinTech loan origination processes and applications are up to 20% faster than other lenders. When credit unions and banks adopt these digital practices, they can expect a streamlined lending process for personal loans.

What Kind of Software Do Mortgage Loan Originators Use?

The type of loan servicing software you will need depends on the type of loan officers in your employment. In this case, the lending business is specific to mortgages and requires loan software tailored to mortgage lending needs.

Mortgage loans are for people who need funding to purchase a home or take out equity. In this case, a mortgage LOS is a loan servicing software specific to mortgage lending. Instead of working directly with a loan officer, the LOS takes care of all loan portfolios and validation, streamlining the user experience from application to acceptance and funding.

Although mortgage brokers can use a mortgage LOS for some of its extraordinary tools to their advantage, it is often better suited to mortgage lenders because it's an end-to-end solution.

Why Do Banks and Financial Institutions Need Loan Origination Software?

Digital solutions are becoming increasingly important to financial institutions and their customers. It makes your financial institution more efficient and allows more consumers to complete financial tasks — like applying for and receiving consumer and mortgage loans — from the comfort of their homes when going through an organization with loan origination solutions.

Banks and credit unions need loan origination software, in particular, because it takes over long and tedious tasks, streamlining them and speeding up the process with features like:

• Loan management, including origination and fulfillment  
• Document management for closing and underwriting
• Eligibility and pricing management for loan applications
• Lending automation and loan process automation
• Interface capabilities for compliance and data exchange

Understanding Loan-Pricing Models

Loan pricing mistakes will stick with you for at least four, if not more, years, and the same pricing strategy could be implemented in dozens of cases (increasing the negative impact on your institution if you price incorrectly). To reduce this problem and optimize your profitability, you must implement a loan pricing model to ensure you connect your borrowers with the possible loan and loan terms. Then you must regularly evaluate your pricing model to keep up with adjustments and environmental changes that may influence your pricing structure.

Chris Nichols on LinkedIn compares the absence of a loan pricing model to:

"Trying to drive across the country without a map or GPS — you might get where you are going, but you might not. If you do make it, the odds are that your route was highly inefficient. Worst of all, you likely didn't record your way, so you can't improve upon your trip next time, and you didn't institutionalize your knowledge so other drivers (lenders) can improve their performance."

In the end, even if you managed to get your loan pricing perfectly right, you risk having no insight into what was right about it to inform future decisions. And then, if it goes all wrong, where on earth do you begin to determine what went wrong if there's no basic model for evaluating or reviewing your process for improvements?

A loan-pricing model is essential, and so is understanding each loan-pricing model to ensure the one you leverage in your institution aligns with your business goals and strategies. Here are some of the most popular loan pricing models to consider and everything you need to know about each model's unique pricing information.

Competition-Based Pricing

When you implement a competition-based pricing model into your loan pricing strategy, you're considering the pricing among your competitors in the financial industry. Using what you know about competitive loan pricing, you'll position your loan prices at a similar rate or lower to attract more borrowers. However, the risk with this model is that you may not be maximizing your profitability, although you would remain competitive.

Relationship-Based Pricing

Relationship-based pricing models center around the value of your relationship with a borrower over time. This shifts the focus from just the one product loan to pricing tailored to the customer acquisition model and relationship.

Here, you would consider how much you can upsell and cross-sell the borrower. What will be the overall contribution from the client? This method is beneficial with key accounts but can also help attract high-value loan borrowers to your credit union or bank.

Risk-Based Pricing (Most Popular)

Risk-based pricing is the most popular pricing model for loans. This is because it considers competitive-based pricing to help your institution remain competitive in the market while also considering the risks in the final decisions. In other words, you would either reject a borrower with risks too high to take advantage of the loan price, or you may proceed with the high-risk borrower but add on premiums to minimize the risk associated with the term.

What Are Some Common Features of Loan Origination Software?

First and foremost, you must consider the pricing model you've chosen as the best for your institution and whether your top loan origination software vendors can integrate that model and important loan origination tools into the platform. If their software cannot integrate integral components of your loan origination process into their platform, they are not the right fit for your bank or credit union.

Other standard features to consider in your loan origination software include the following.

Analytics

We are in a very digitally-focused era, and any knowledge or insight you can obtain from your customers can make a big difference in how your bank or credit union operates. After all, your loan borrowers are the sole purpose of your services, so you want to ensure you're meeting, better yet exceeding, their expectations.

The type of LOS vendor you choose should be able to track and review your app's performance, patterns that shine a light on everyday issues many of your users are experiencing, and potential causes or motivations for losses. What's more, it should be real-time data that can properly inform your future decisions and forecasting.

Painless Onboarding

The whole point of implementing loan origination software into your institution is to alleviate the stress and added labor put on your loan officers while enhancing your borrower's experience. Suppose the core banking digital onboarding process isn't as painless as possible for your potential borrowers.

In that case, you risk them turning to your competitors for their funding or badgering your loan officer with numerous questions. As a result, they're kept away from more important matters they could be tending to.

This feature should also be considered for employee and customer onboarding. New hires should also have a seamless time integrating into the way the software works so there are no delays in production.

Automated Customer Support

Along the same lines as easy and painless onboarding, your customers should have access to automated customer support. The origination process is often complex and challenging for borrowers. Having access to immediate support for all their questions will reduce the number of questions directed at your busy loan officers and allow your borrowers to find quick answers to questions/problems.

As a growing number of people prefer self-service solutions to their problems (40% favor it over human contact, and 70% now expect it from brands and institutions), having AI support like chatbots and knowledge bases like FAQs/Q&A pages can be very helpful.

Dashboards

You will also want to evaluate each vendor's dashboard in their software, as it will dictate your employee experience with the software and the customer experience. For lenders, a great dashboard will give you a holistic view of the consumer journey through the application process and customer identification program. For borrowers, a great dashboard will help them efficiently manage and navigate loans, as well as help with the origination process.

Key Elements to Consider Before Investing in Loan Origination Software

Deciding on a loan origination software takes a lot of time and research. You don't want to use just any software because it can be the make-it or break-it of your loan origination process. All the bases need to be covered before determining which vendor is providing you with the best possible price and deal.

Before moving forward, here are key elements to consider before making such an important investment.

What Are Your Specific Needs?

Not every financial institute will require the same solutions to similar problems, and a one-size-fits-all approach could easily hinder your potential with the software. The key is to identify your specific needs to ensure the LOS you invest in offers the right solutions and tools to meet those needs and achieve your goals. Some factors you would consider here — although you should certainly take this consideration to a deeper level — include your channels and future plans (any foreseeable growth).

How Many Technology Systems Will You Need?

Consider your current tools and the ones you need — will you use separate systems to leverage all the necessary solutions? This could get pricey if your needs are met by outside vendors in addition to your software.

How much more it will cost you will vary from vendor to vendor. On the other hand, a customized set of solutions in one place (made possible by a loan origination system that allows the necessary integrations) can make all the difference.

How Trustworthy Is the Technology Provider You're Getting Your System From?

Your provider will dictate the level of success you will achieve with your LOS. If your provider isn't trustworthy, then the likelihood that you will provide your customers with trustworthy experiences is significantly less likely. When it comes to your technology provider, you must do your homework and weed out any bad seeds (i.e., unreliable bad reviews, financial issues, questionable practices, etc.). This way, you're left with only vendors you can rely on to help you grow your bank or credit union into a force to be reckoned with against FinTechs.

Loan Origination System Pricing: What Is Included?

Review the tools and features that are included, as well as not included, in your system pricing package. Are you getting all the tools you need in the basic package? Will you need to continue adding on as you scale and your needs change?

If so, this can get considerably high in cost. You will need a system that easily moves you from the beginning of the process to the final steps of the deal, with the flexibility to customize your solutions to your ever-evolving needs.

Who Is the LOS Pricing for? Brokers, Lenders, or Institutions?

Finally, when evaluating costs, you must also consider who the LOS is for. Pricing can vary by user, with brokers requiring scalable pricing per user, lenders requiring pricing that is a flat rate and success-linked, and institutions that often receive quotes by request to meet both lender and broker needs as other features. Since all three have very different needs, you should consider where you fall in this category and what that means when choosing software that meets your specific needs and pricing.

How Much Does Loan Processing Cost?

The cost of loan processing often varies from lender to lender, with some considering charging no processing fee to borrowers to get a leg up on the competition. This means money out of your pocket instead of theaverage 1-2% of the borrower's loan coming out of the fees you charge them for operating costs.

How can you compete with the rising popularity of FinTech and strong competitive interest rates? With automation!

When you cut back on tasks completed by humans, you cut back on operation costs and, therefore, are better able to reduce fees and interest rates to compete with these growing digital financial companies. As for how much loan origination software costs, you'll see more money coming back from AI features and tools that make your financial institution run more efficiently.

How Much Does a Typical Loan Origination Software Cost?

Several factors must be considered when determining loan origination software costs, including (but not limited to):

• Deployment type — applications often have multiple deployment types, with processes for how the application works on given devices varying from vendor to vendor. Discuss what you can expect from each software company you explore.
• Tools and features— all-inclusive packages will cost significantly more than those with only a handful of tools. On the other hand, an all-inclusive package is a much better deal than just a basic plan with numerous add-ons.
• The number of users — the number of people the software serves will also determine pricing, as there are smaller companies that can adhere to small institutional needs. However, more prominent companies with more extensive capabilities may cost more, but they can serve more team members in your organization.

As a result of varying needs influencing the cost, numbers can range from around $40 a month for just one user and about $300 for 25 to as much as $1500 a month for more comprehensive and all-inclusive solutions.

Loan Origination System Examples

Depending on the type of loans your borrowers are interested in, you can leverage many popular loan originator systems. Each has its unique and specific purpose, full of tools and solutions that best suit the needs of the loan types categorized in each. Here are three examples to consider to get an idea of which would best cater to your business needs and goals.

Consumer Loan Origination System

A consumer loan is one that a loan business provides to consumers. Loans under this category would include auto loans, credit cards, and personal and student loans. A consumer LOS is a type of loan software specific to helping consumers navigate the system when filling out the application, loan validation, etc. This means that the dashboard is stocked with great information and navigation that allows the customer to easily get from the early stages of the loan originator to its final.

Consumer loan origination systems also distribute the funding for loan officers following the terms and services agreement from the applicant. This means less time your loan officers spend on closing the deal and managing the disbursement of money and more time on other financial matters.

Construction Loan Origination System

A construction loan origination system is software unique to providing financial loan services to construction companies for their projects. Managing the lending process from beginning to end — for residential and commercial projects — can get significantly complex. However, complete visibility is required to ensure the borrower and lender are both benefitting: lenders from reduced risks and construction companies from direct communication with lenders and tools for inventory tracking, budgeting, project reports, and more.

Although this LOS offers construction-specific tools that enhance the borrower's experience with the lender and their loan management, the features in a construction loan origination system also have the standard tools offered in other systems. This way, they have the same benefits as other systems with more specific tools to fit their construction needs.

Commercial Loan Origination System

In order to offer an exceptional lending experience, commercial lenders need a streamlined commercial loan origination system. This LOS is excellent for simplifying and automating the entire loan process for better client experiences when applying for a commercial loan. In this case, a commercial LOS benefits banks and credit unions geared towards debt-based funding arrangements with a business.

The process for a commercial loan origination system can be lengthy and sometimes even complex. Still, with the right software, the entire loan process can be much easier and quicker for both parties.

How Can an Organization Successfully Implement a Loan Origination System?

The key to instantly benefitting from loan origination software is to partner with a vendor to implement the system into your organization as quickly and seamlessly as possible. When you have the right partner, there are only a few steps you should take to ensure the transition is successful.

Have Your Goals and Metrics Laid Out

Before jumping into a significant investment, you must have goals in mind (better yet, clearly defined ones written out) for what you expect to achieve with that initiative. With your LOS, is the objective to improve customer experiences when applying for loans? If so, you must also lay out the metrics you will use to evaluate your system's success in reaching those goals.

Be Prepared to Make Improvements From This Point On

The first day won't be easy — moving your team to the digital world for loan processing will take time to adjust. We recommend starting with the fundamentals of the software and then gradually adding more enhanced features as you get the ball rolling. This allows your team enough time to familiarize themselves with the software while informing you of improvements/adjustments as you review results and collect feedback.

Define Employee Roles and Responsibilities

You'll need staff members you can trust to manage your loan origination software and ensure that it runs to the best of its ability. As a result, it's recommended that you define which employee(s) are responsible for which stage of the loan process to better review and assist with any potential complications (or to help with recommendations).

Training Isn't Exclusive to Just the First Few Months

Training is essential in the first few months of starting a LOS, but it shouldn't stop there. There is much to explore and take advantage of in a loan origination system. The better equipped your team is to navigate the advanced technology, the better fit your business will be to have success with its implementation. We recommend training specific employees for specific roles before providing border training to enhance the collective knowledge of your system and how it runs.

Regularly Collect Feedback and Reviews to Inform the Process

The only way you can ensure your system is at its maximum potential is to listen to the feedback and reviews of employees and borrowers. Are there issues that keep popping up for them?

If so, how can you solve it? Also, when there are recommendations for making the experience better for users, you should consider those to inform future decisions.

Cotribute: The Digital Customer Acquisition Platform for Credit Unions and Banks

Cotribute is your cloud-based CRM compatible with third-party integrations and at the top of its industry in customer acquisition. As FinTech and similar institutions make their mark in the industry, it becomes imperative that your bank or credit union can compete with their digital documents and banking solutions.

In fact, research shows that 85% of people prefer their banking to be online, and 20 to 25% would also like the convenience of opening their bank accounts digitally. With Cotribute, you can do all this and more, providing your banking customers with the online experience they've come to expect from financial institutions.

To learn more about Cotribute and our digital solution empowering banks and credit unions,schedule a demo to tour our platform today.

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