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How Do they Do that? Instant Loan Decisioning Explained

Automated loan origination software helps banks and credit unions make near-instant decisions about small business loans. Here’s how it works.

How Banks and Credit Unions Can Use Automation to Streamline Loan Origination

Today’s unprecedented market pressures are forcing banks and credit unions to change the way they make loan decisions. Small and midsized businesses (SMBs) urgently need faster loan decisions to survive the economic challenges of COVID-19. As consumers, these business owners are accustomed to managing their personal banking online. They expect the same convenience and responsiveness from their businesses’ financial institutions when it comes to loan decisioning.

To meet rising SMB demand for commercial loans, small and midsize lenders must be able to make fast decisions or risk losing these customers to bigger, nimbler banks. Meanwhile, increasing competition is forcing financial institutions of all sizes to reduce costs and improve efficiency. No wonder that more and more small lenders are looking for ways to streamline the loan origination process while reducing credit risk.

Wouldn’t it be nice if banks and credit unions could make decisions about small business loan applications instantly? Thanks to automated loan origination solutions, this is no longer a dream—it’s reality.

How Automated Loan Decisioning Works

Automated solutions can quickly evaluate loan applicants, reducing credit risk for lenders while offering SMBs fast access to capital. It’s a win-win situation. So how, exactly, does it work? Here’s a closer look at what happens when lenders automate the loan origination process.

Step 1: Gathering customer-provided data

Automated loan origination begins by collecting data provided by the customer. Traditional loan applications use paper forms, printed or faxed documents and physical recordkeeping, adding complexity to the application process. Manually reviewing documents and inputting data from written forms is time-consuming and prone to human error.

With an online loan application system, however, SMBs can apply for loans and upload necessary information in minutes rather than days. Software can quickly identify missing information without human review and automatically contact applicants to request corrections or complete missing fields.

Step 2: Gather inferred data from third parties

Loan decisioning software APIs can pull relevant data from third parties in a matter of minutes. When lenders automate gathering information such as bank and accounting records, tax returns, verification of identity, business and personal credit scores, and industry information, it saves time and effort for both applicant and lender.

Collecting digital information from data sources also helps to ensure that lenders have the most current available data in key areas such as cash flow, enhancing risk management. Instead of reviewing printouts of last month’s bank statements, lenders can see a business’s bank data in real time and immediately spot potentially negative trends, such as declining revenues.

Step 3: Gather inferred data automatically in the background based on behavior.

Automated loan origination platforms can do more than collect information provided or authorized by the borrower. These lending solutions can also gather inferred data based on the borrower’s online behavior, such as web searches, social media activity or shopping.

For instance, if an SMB loan applicant is posting photos of their expensive vacation on Facebook or shopping online for luxury sports cars, it may indicate a lack of financial responsibility. Inferred data can also be used to identify and suggest other financial products the borrower may need.

Step 4: Combine credit application data as inputs to an AI-based decision engine constrained with a bank-defined rules engine.

Once the information that has been gathered is fed into the decision engine, AI can make instant decisions about the credit application based on this data. Since automated loan origination isn’t meant to override your bank or credit union’s existing lending process, the best automated solutions allow lenders to set parameters for how and when the decision engine will operate based on their business rules.

This can vary depending on a lender’s procedures and desired customer experience. For instance, when a loan is denied, the decision engine could immediately tell the applicant; inform the underwriter; or direct the applicant to a referral partner that may be interested in making the loan.

Loan applications that pass a financial institution’s initial criteria move to underwriting for further review of factors such as financial ratios and available collateral. If approved by the underwriter, they move to the AI-based decision engine.

The automated decision engine calculates risk based on the bank or credit union’s criteria, and either adjusts the terms of the loan offer accordingly or refers this credit decision to the loan officer. In some cases, your platform may even extend a loan offer directly to the customer.

Automated Loan Origination in Multiple Scenarios

While “automated” may conjure visions of robotic loan approvals and denials, in reality the best loan origination systems offer lenders great flexibility. For instance, banks and credit unions can choose to handle most of loan decisioning manually if they desire, using AI only to assist in the underwriting stage.

Another option is to use a hybrid method in which the AI makes recommendations and passes them to the underwriter. The underwriter can manually review anything questionable, gather additional information, modify the offer and make the final loan decision.

In the most efficient model, lenders give AI-based platforms latitude to price or orchestrate the loan offer based on the data in the loan application and inferred from third party integrations. The customer can then accept the offer immediately. The ability to configure the platform to your financial institution’s needs is key to making this work. For example, a lender might allow AI to make offers only on a contingent basis or only for loans below $100K.

Automating aspects of your loan origination process doesn’t mean becoming a cookie-cutter organization. That’s why it’s critical to choose an easily extensible digital lending platform that can be configured to your bank or credit union’s specific policies and modified rapidly as needs arise.

Benefits of Automated Loan Origination

The benefits of automated loan origination are many:

  • Efficiency: Every step of the origination process can be handled more quickly, allowing banks and credit unions to make rapid decisions. Lenders can better serve existing SMB customers and onboard new ones much faster than the traditional commercial onboarding process allows.
  • Accuracy: Traditional loan origination methods are subject to human error at any stage of the loan application and decisioning process. This is no longer a factor when AI is used to gather all the required information, search for missing pieces and analyze the data.
  • Consistency: Automated solutions adhere to a lender’s underwriting policies, ensuring consistent decisions and removing hidden biases. Evaluating every loan application on its own merits ensures a consistent approach to risk while allowing for manual review when needed.
  • Compliance: An automated lending platform simplifies record-keeping by automatically collecting documents and recording the reason for decisions. Financial institutions can rest easy they’re in compliance.
  • Customer service: The benefits of auto decisioning continue long after the loan is disbursed. Automated solutions that can monitor risk, manage loans and gather required data ensure loans are monitored consistently and compliantly.

The New World of Loan Origination

Loan origination has come a long way from the days when credit committees had to meet and discuss loan applications to make a decision. AI-based solutions can assess the same factors human loan officers consider much faster, more consistently and more accurately.

Automating loan origination with the right business lending platform can benefit both you and your customers by enhancing your institution’s efficiency, reducing risk and delivering cost savings, while giving small business owners the service and solutions they need.