How Future-Ready is Your LOS Selection?

Many financial institutions are looking to implement a new loan origination system this year. Unfortunately, too many FIs are making their LOS decisions in reaction to general industry issues promoted by their vendors.

In contrast, “future-ready” bankers choose their LOS based on pre-determined objectives and clearly defined targets that subsequently lead to measurable strategies and methodologies.

Here’s a little test. Try categorizing each of the criteria in the chart below as either reactive of future-ready.

It probably didn’t take long to identify the telltale differences. So, bankers, my question today is this:

Is your LOS selection reactive? Or are you approaching it like a future-ready banker?

Purchase Drivers

In a typical reactive LOS selection, the vendor aims to provide purchase drivers during and/or after the system demo that align with the beliefs or position the bank holds. However, because the vendor wants to sell its LOS to a broad range of FIs, its purchase drivers tend to be “fluffy” and lack specificity. For example, the vendor may propose that its loan origination system will:

• Reduce redundant data entry;
• Allow the lender/commercial RM more time to be in front of the client; and
• Speed time to decision.

Yeah, so what?

The future-ready bank, on the other hand, pushes for purchase drivers that are well-designed and well-defined, specific to the institution, grounded in the reality of the bank’s current state, and measurable. For example, future-ready purchase drivers:

• Increase the number of loan document packages produced per FTE by X;
• Increase portfolio dollars outstanding per lender by $XX million;
• Increase application production per underwriter from X to Y; and
• Reduce the percentage of the delinquent portfolio the first 90 days to 0.XX%.

These purchase drivers illustrate specific areas for performance improvement at the bank and provide a quantifiable measure of the desired improvement.

Functionality Requirements

This is where the differences are most clear. Reactive LOS selections will obviously have the necessary functionality requirements that support the purchase drivers suggested by the vendor. Show me a vendor where these don’t match up in the scripted demo and I will show you a vendor that isn’t going to be in business very long.

The future-ready banker identifies situations in users’ day-to-day processes and articulates the functionality needed in his LOS selection to correct them. For example:

• Situation: Loan assistants spend too much time working packages for submission to documentation with 60% of initial submissions rejected due to missing information.
  • Functionality Requirement – Automated pre-documentation checklists dynamically built based on the terms and conditions detailed in the loan approval.
• Situation: Number of loan approval packages per credit analyst is too low due to number of proposals not meeting initial underwriting review criteria.
  • Functionality Requirement – Workflow must route new loan requests for prospects through a proposal review process capturing management approval to proceed.
• Situation: Loan originations are delayed due to lender submitting request through incorrect underwriting channel, creating a one-day delay in underwriting.
  • Functionality Requirement – Auto routing of loan request via objective criteria to appropriate underwriting workflow.

ROI Calculations

Most vendors have some version of a return on investment based on a client case study. This ROI is real, but who knows whether the client in the case study is a future-ready banker or simply fell into the increase in performance? The point is that the vendor often tries to apply the case study and the resulting performance to any bank as justification. Could it be applicable? Maybe, but the banker that makes a reactive LOS selection doesn’t know for certain. This uncertainty leaves the banker open to and defenseless against challenges by opposing opinions or the plain reality that erodes the foundation of the reactive buying decision. And, it can lead to problems down the road (implementation delays, lack of adoption, etc.).

Future-ready bankers already know the ROI because they have identified the purchase drivers and desired future performance and have measured the impact to their financial institutions. For example:

• Routing small business loan requests through an expedited process results in a reduction in underwriting expenses of $XXX,XXX per year.
• LOS automation increases the capacity of each lender by XX%, allowing the FI to grow the portfolio over the next three to five years without adding staff.
• Re-assigning workflow tasks from lenders to credit analysts reduces the cost of origination by $X,XXX while increasing capacity by XX%.
• Reducing the time required to process renewals/reviews by XX% allows the lender to increase the time spent in new business development, which results in increased new business production of $X million per year.

The Moral of the Story

The reactive bank sees increased cost of delivery and a reduction in its competitive position. The future-ready bank realizes solid adoption of a platform that improves performance and the customer experience while at the same time improving the bank’s bottom line.

With an investment of $250,000 to $5 million or more over the next five years, which path do you want to take?