How to Manage Loan Origination Risk

3 Mins read

Banks and financial institutions need to think carefully about loan origination risk, or minimizing risk while still making attractive offers to their customers. What’s the best way to go about this process? And what strategies will lead you to long-term success?

Use the Right Tools and Technologies

Better tools and sophisticated modern technologies can help your bank properly assess, plan for, and reduce risk throughout the organization. For example, SPARK is a platform that helps financial institutions mitigate risk at each step of the loan origination journey, from inquiry to funding. It has tools and resources for intake, underwriting, packaging, closing, and even disbursement – helping your organization better understand and manage loan origination from start to finish.

With better tools in place, you’ll have platforms that make your risk management more consistent, better documented, and streamlined. This way, you’ll minimize risk while saving money, improving efficiency, and ultimately allowing you to continue operating uninterrupted.

Hire the Right People

It’s also important to hire the right people. No matter how much automation and AI technology you use, you’re still going to need knowledgeable, intelligent people to design and execute your risk management processes. A risk manager, compliance specialists, and consultants can all improve the infrastructure and operational policies within your organization; these are critical roles that you can’t afford to neglect. With better leadership in place in this department, everything gets easier.

Follow All Guidelines

Depending on where you’re operating, your institution is probably subject to strict rules and guidelines for loan origination. It should be obvious that it’s important to ensure that your organization follows all these rules and guidelines. You also need measures in place to make sure you stay apprised of new laws and regulatory developments, so you can remain in compliance over time. The fines and collateral damage associated with violating regulations can be steep, so it’s well worth a proactive investment to avoid unnecessary infringements.

Create a Strict Underwriting Process

Better underwriting allows your organization to accurately calculate risk and make the right offers for the right customers. There’s no such thing as a universal underwriting process, since different organizations will have different structures, goals, and ways of doing things – plus, you’ll always need to leave room for flexibility for future developments and fringe cases. 

That said, you should document a strict underwriting process that you follow for all loan applicants so you can consistently evaluate the risk associated with each of them and create a paper trail for future reference.

Become Security Conscious

One major risk that loan originators need to consider is a data security vulnerability. If your organization suffers a data breach, or if customers’ data is rendered vulnerable, it could have massive consequences for your organization.

· Vet your partners and platforms. Always take the time to vet your partners and platforms. Before choosing a new cloud software platform or working with a new partner, do your due diligence and make sure you understand their security measures. You don’t want to entangle your business with an entity or product that has lax security standards.

· Improve your security infrastructure. It’s also important to improve your own security infrastructure. With a cybersecurity team, you can invest in tools like firewalls, VPNs, and proactive monitoring software to ward off most threats and create an alert system to take action on threats that become more serious.

· Train and educate your employees. Most data breaches are attributable to human error. All it takes is one employee mistake to completely compromise your organization, so it’s important to train and educate all your employees on modern cybersecurity standards. Basic practices, like using strong passwords and avoiding common scams, can instantly heighten your security.

· Train and educate your customers. It’s also a good idea to train and educate your customers. No matter how secure and robust your lending platform is, if a customer gives out their personal information to a nefarious party, their account could be jeopardized. Even though this may be the customer’s fault, it could have consequences for your organization, so get ahead of it by keeping customers informed.

Invest in Insurance

No matter how much you proactively practice risk management, there are some threats that are practically unpreventable. That’s why it’s a good idea to invest in insurance to protect your business.

Document Everything

Finally, make it a point to document everything. Document all your processes, every stage of the loan origination process, and materials for all customers. This way, you have an audit trail if there’s ever an issue in the future.

With loan origination risk under control, your bank will be in a much better position to close and disburse more loans – and ultimately remain more profitable. This is a significant investment, but it’s a practically essential one if you want your business to last indefinitely. 

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