Loan Origination is the complex process of lending money in financial institutes such as banks, mortgage lenders, etc. The process includes different stages starting from receiving an application to disbursal of funds or declining at any stage.

Below are the stages of the loan origination process:

In each stage, there are several decisions to be made before going to the next stage. Each business decision requires context, data from systems, and to be collected from prospects and specifically depends on the status of involvement with the prospects. These types of decisions are called situation-aware decisions.

Challenges in Loan Origination Process

There are several challenges in the existing loan origination processes.

  1. Slow processing time, taking days to make decisions
  2. Market and government laws and regulations changes
  3. High Cost

These issues can often lead to dissatisfied customers. No one likes to wait for a long time for loan approval, paying higher amounts.

Therefore, let’s see how one of the stages in the loan origination process which is the Application Processing stage can be automated and how to overcome these issues.

Automating the Application Processing Stage

The loan application process itself contains several steps. These are the high-level set of steps:

  1. Collect application
  2. Validate application data
  3. Determine bureau strategy
  4. Depending on the bureau strategy, collect bureau data
  5. Validate bureau data
  6. Determine routing
  7. Depending on routing, collect further documents
  8. Accept or decline the application

The following diagram created using FlexRule® Advanced Decision Management Suite demonstrates a workflow combining different steps throughout the application processing stage. It connects the data sources, human interactions, notifications, along with the decisions that can be fully automated without any human involvement.

loan origination

Let’s move deeper into the flow by looking at the first decision which is “Decide Bureau Strategy”.

The following DRD shows the Decision Requirement Diagram (DRD) used to determine the Bureau Strategy. As you can see, Applicant Data and Requested Product are the inputs that we need to decide on Bureau Strategy. We will also require making initial decisions such as eligibility, affordability. The DRD clearly represents the decision hierarchy making it easier to understand how and when each decision is made.

Since we know the decision hierarchy, let’s see how we make each decision based on business rules. The following decision table is used to calculate the Application Risk Score based on age, marital status, and employment status.

For example, if the age is between 18 and 21, we will be adding 32 to the application risk score.

Additionally, you can use a Natural Language document to model the business rules. This helps to define the business rules using natural language.

** This is only part of the NL rule document shown here.

A business decision can be implemented using many different techniques. Like the example above, if a decision is rule-based, there are multiple options to model the rule-based business decision. Also, business decisions can be data-driven e.g., analytical, statistical, or ML models. FlexRule® Advanced Decision Management Suite allows you to build, train, and integrate ML and other decisions into the decision graph and, as a result, a seamless integration into organizations' processes.

Transparency of Business Decisions Improves Loan Origination Process

What is interesting about the loan origination process is that it involves many complex decisions at certain stages. The decisions in the loan origination process will determine how to engage with the prospect. Each decision requires many different sets of data from the prospect, depending on the stage of the prospect's involvement. These situation-aware decisions make the process complex.
Given the importance of this process as one of the core processes of lenders, they need to ensure consistency and accuracy of the outcome. Otherwise, bad decisions lead to inconsistent outcomes, bad loans, reputational damage, and loss of market share.

Last updated March 9th, 2023 at 09:32 am, Published March 3rd, 2022 at 09:32 am