2014 is turning out to be a year in which many financial institutions are considering replacing aging or inadequate loan origination technology. Let’s just get this out of the way right up front: most bankers rank going through a formal system selection process right up there with a trip to the dentist. The biggest difference is that if the system selection is not done properly, the pain lasts a hell of a lot longer. So, having dispensed with the pleasantries we’ll move right along and in the spirit of Kramer, just say “Giddy Up!”
It’s time to make the rounds throughout the industry and provide a “GonzoLender” perspective on new developments in the world of loan origination systems. While mortgage origination seems to be the hottest topic on the street today, GonzoLender also sees growing activity in the Consumer LOS area.
On the mortgage side, re-fi volumes have obviously fallen off a cliff, allowing some time for reflection. Lending execs across the country were clearly dissatisfied with how manual processes and lackluster technology were used to stumble through those massive re-fi volumes. So, as our clients are telling us, it’s time for a change. There is a new world of mobile delivery, e-documents and big data analytics, and banks want to catch up with the times in applying these technologies to the mortgage business.
The industry is also witnessing a slew of non-traditional lenders receiving heavy infusions of venture capital funds with the sole strategic goal of challenging the traditional bank and credit union lending model. These disruptors are going to change the technology standards that customers expect, and traditional banks will need to be very crafty in how they evolve to match these new standards.
In the LOS world, bankers have moved past using back office software to crunch debt-to-income ratios and are looking instead to create a unique borrowing experience for customers with ease of use and specific turn-around times as the central components of the bank’s brand. Bankers face a lot of work and challenges as they attempt to marry new lending systems with elegant, customer-friendly lending processes.
So GonzoLenders, if an LOS selection is in the near future for you, here are the Top 5 things to consider.
1. Online Applications and Borrower Portal
A key requirement for the front end of any LOS is to provide the borrower with convenient, online access to apply, submit documents and check loan status. The application process, for both the borrower and the bank staff, should be streamlined and offer clear gathering of data, straightforward selection of products and services, and simple navigation. As much as it pains us to see it, we frequently see clients manually re-keying applications in the back office that were already typed online by customers. Another unfortunate truth is a majority of these “Internet applications” are nothing more than a static application form on the company Web page that submits to the back office to initiate the loan process.
In addition to improving the application process, cross-sell opportunities should be well integrated using a combination of institutional data (i.e., core, data warehouse, etc.) and real-time trade line information to present a “qualified” cross-sell opportunity at the right time in the process. Cross-sells should be highly dynamic and reportable, allowing the organization to understand what is being cross-sold well and by whom. A system’s ability to provide a crisp story around customer acquisition and cross-sell during the application process has become a huge area of focus in selections as of late. As a result, Retail and Marketing are becoming just as involved as Lending in the selection process to ensure this front-end customer experience is spot-on.
A solid borrower portal should support strong communication and interaction with the customer, electronic upload of documents, secure e-mail and/or communication capabilities, disclosure and documentation review and real-time loan status updates. Actually, let’s up the ante and allow the borrower to take a picture of her paystub and upload that to the portal through her mobile device. Now we’re talking!
2. Paperless Processing and Workflow
Out of all potential lending process improvements, paperless processing truly yields the most potential for positive benefits and can radically transform an organization. However, it is also a massive cultural shift for most shops to absorb. Since e-processing dramatically alters the existing processes, there is a pre-conceived notion that it will impact the staff’s ability to provide good customer service. In fact, paperless processing should free up staff from manual tasks, loan checking, compliance and QC efforts and streamline communication to allow for more time to provide hands-on service. A good system will support a 100% paperless environment including digital communication and document transfer with the client and seamless integration to image archive and/or imbedded doc archive functionality for doc storage and retrieval.
E-sign should be fully supported for applications, disclosures and closing docs. Adoption is recognizably slower on the real estate side, as some investors in the secondary market still won’t accept certain e-signed documents. With time, the industry will adopt more digital signatures, especially given the Consumer Financial Protection Bureau’s e-closing pilot program to be launched later this year, where guidance on future regulatory requirements will almost certainly be identified. Regardless whether it’s captured on a signature pad in the branch or a “fignature” (signing with a finger) on a mobile/tablet device, an e-signature should be the standard going forward, especially for all non-real estate loans.
Also, bankers should look for a system that can support all processes from start to finish, not just the traditional origination process. For example, an auto loan process does not end at funding, it ends when the title is received and recorded. Systems that can support these activities through imbedded functionality or supporting workflows are best in class.
3. Robust Decision Engine
A good LOS isn’t worth more than a few bitcoins if it doesn’t have a robust decisioning and rules engine. Particularly for e-consumer lending, the improved functionality available through the decision engine should clearly translate to an increase in loans that are 100% auto-decisioned and funded. Here’s a brutal truth for Gonzo lenders: most organizations are doing a poor job right now with true auto-approvals on loans. According to Cornerstone Advisors’ most recent performance studies, credit unions are auto-decisioning only 22% of their loans. Although this is four times as many loans as banks, both credit unions and banks are coming in well below our go-forward, Gonzo target of 50%.
Decision engines should be able to support a deep, multi-layered underwriting scorecard that can integrate all of the components of loan policy within the decisioning process.
Integration of the LOS with the bank’s core system has become table stakes today, but modern origination systems all need solid integration with title, flood, auto-valuations, insurance, appraisals, etc., with real-time, two-way communication where applicable. The LOS should be fully integrated to eliminate the need to manually enter data or browse out to third party Web sites. The days of manually re-keying data for these providers and printing hard copies for safekeeping in the file should be well behind us.
5. New Account Opening
Another cost of entry for an LOS provider is the ability to offer new account opening at the time of loan application. As referenced above, the whole process related to the front-end customer acquisition is usually agenda item #1 in the decision-making process. So, the ability to capture an applicant and get him into a new deposit account (and/or cross-sell) is critical. The system should be able to fully support customer verification (field of membership for credit unions) and run OFAC. In addition, customers should be able to fund their accounts in a variety of ways, such as debit/credit cards and internal/external transfers.
So, there they are: five GonzoLender strategic requirements for bankers to consider when shopping the LOS market today or in the not-too-distant future. We recommend that banks exercise EXTREME caution when searching for the ever-elusive “Enterprise LOS” that will allow for a consistent application process for consumer, mortgage or small business loans and that supports an in-branch, online or mobile experience. While this unicorn of a system sounds exciting, right now this LOS exists mostly in Power Point presentations and brochures. There are, however, some vendors working hard to bring stronger enterprise solutions to market soon.
I guess we will all have to keep our Gonzo ears to the ground, but let’s not wait for the perfect solution. It’s time for Gonzo lenders to bring their LOS solutions into the next generation of delivery.
P.S. GonzoLender thinks the term “fignature” needs to catch on, so let’s take this viral.
If any of these sound familiar, we should talk. Cornerstone Advisors has been helping banks and credit unions make educated decisions about their systems vendors for more than a decade. We’ve done it hundreds of times, and we have a long list of satisfied clients to prove it.