Business, Legal & Accounting Glossary
Loan origination is the process by which a borrower applies for a new loan, and a lender processes that application. Origination generally includes all the steps from taking a loan application through disbursal of funds (or declining the application). Loan servicing generally covers everything after disbursing the funds until the loan is fully paid off. Loan origination is a specialized version of new account opening for financial services organizations.
There are many different types of loans. Steps involved in originating a loan vary by loan type, various kinds of loan risk, regulator, lender policy, and other factors.
Applications for loans may be made through several different channels and the length of the application process, from initial application to funding, means that different organizations may use various channels for customer interactions over time. In general, loan applications may be split into three distinct types:
Retail loans and mortgages are typically highly competitive products that may not offer a large margin to their providers, but through high volume, sales can be highly profitable. The business model of the individual financial institution and the products they offer therefore affects the which application model they will offer
The typical types of financial services organizations offering loans through the face to face channel have a long-term investment in ‘brick and mortar’ branches. Typically these are:
The appeal to customers of the loans offered directly in branches is the often long-standing relationship that a customer may have with the institution, the appearance of trustworthiness this type of institution has, and the perception that holding a larger portfolio of products with a single organization may lead to better terms. From a bank’s standpoint, cross-selling products to current customers offers an effective marketing opportunity, and agents in branches may be trained to handle the sale of many different types of financial products.
In a branch, customers typically sit with a sales agent who will assist the customer in completing the application form, selecting appropriate product options (such as payment terms and rates), collecting required documentation (new account opening compliance requirements must be met at this stage), selecting add-on products (such as payment protection insurance), and eventually signing a completed application.
Dependent on the institution and product being offered, the application may be completed on a paper application form, or directly into an online application through the agent’s desktop system. In either case, this phase of the application is mostly concerned with the accurate capture of customer’s details, and does not incorporate any of the background decisioning work required to assess the suitability of the customer and the risk of default, or the due diligence that must be performed to mitigate the risk of fraud and money laundering activities.
A major complexity for the branch origination channel is making the process simple enough that sales agents can be easily trained to handle many different products while ensuring that the many due diligence and disclosure requirements of the financial and banking regulators regionally are met.
Many back-office functions of loan origination continue from this point and are described in the Processing section below.
Jobs the online application should perform:
The mortgage business consists of a few people: the borrower, the lender, and sometimes the mortgage broker. The people that originate the loans are usually the mortgage broker or the lender. Depending if the borrower has creditworthiness, then he/she can be qualified for a loan. The norm qualifying FICO score is 620 for SISA/SIVA loans and 600 for Full Documentation Loan loans. Depending on what the borrower’s credit scores are the lender can assess the risk they may take.
Not only does one’s credit score affect their qualification, but the fact of the matter also lies in the question, “Can I (the borrower) afford this mortgage?” In most cases, the borrower can afford their mortgage. However, some borrowers seek to incorporate their unsecured debt into their mortgage (secured debt.) They seek to pay off the debt that is outstanding in amount. These debts are called “liabilities,” these liabilities are calculated into a ratio that lenders use to calculate risk. This ratio is called the “Debt-to-income ratio” (DTI). If the borrower has excessive debt that he/she wishes to pay off, and that ratio from those debts exceeds a limit of DTI, then the borrower has to either pay off a few debts in a later time and pay off just the outstanding debt. When the borrower refinances his/her loan, they can pay off the remainder of the debt.
Example: if the borrower owes $1,500 in credit cards and makes $3,000 in a month: his DTI ratio would be – 50%. But if the borrower owes $1,500 and makes $2,000 in a month, his DTI ratio would be – 75%. This ratio is seen by many lenders as high and too risky a person to lend to and may or may not be able to afford the mortgage. So that covers qualification, now on to appraising collateral.
Pricing policy varies a great deal. While you probably can’t influence the pricing policy of a given financial institution, you can:
Pricing is often done in one of these ways. Follow the internal links for more details:
Many of the customer identification and due diligence requirements of loan origination are common to new account opening of other financial products.
The following sections describe the specific requirements of loans and mortgages.
The next step is to have a Real Estate appraiser appraise the borrower’s property that he wishes to have the loan against. This is done to prevent fraud of any kind by either the borrower or the mortgage broker. This prevents frauds like “equity striping” and money embezzlement. The amount that the appraiser from either the borrower’s side or the lender’s side is the amount that the borrower can loan up to. This amount is divided by the debt that the borrower wants to pay off plus other disbursements (i.e. cash-out, 1st mortgage, 2nd mortgage, etc) and the appraised value (if a refinance) or purchase price (if a purchase) {which ever amount is lower} and converted into yet another ratio called the Loan to value (LTV) ratio. This ratio determines the type of loan and risks the lender is put up against. For example: if the borrower’s house appraises for $415,000 and they wish to refinance for the amount of $373,500 – the LTV ratio would be 90%. The lender also may put a limit to how much the LTV can be – for example, if the borrower’s credit is bad, the lender may limit the LTV that the borrower can loan. However, if the borrower’s credit is in good condition, then the lender most likely not put a restriction on the borrower’s LTV. LTV for loans may or may not exceed 100% depending on many factors.
The appraisal would take place on the location of the borrower’s property. The appraiser may take pictures of the house from many angles and will take notes on how the property looks. He/she will type up an appraisal and submit it to the lender or broker (depending on who ordered the appraisal.) The Appraisal is written in the format compliant to FNMA Form 1004. 1004 is the standard appraisal form used by appraisers nationwide.
An underwriter is a person who evaluates the loan documentation and determines whether or not the loan complies with the guidelines of the particular mortgage program. It is the underwriter’s responsibility to assess the risk of the loan and decide to approve or decline the loan. A processor is the one who gathers and submits the loan documents to the underwriter. Underwriters take at least 48 hours to underwrite the loan and after the borrower signs the package it takes 24 hours for a processor to process the documents.
Lending is a highly regulated business, at both the Federal and State levels. Some of the main regulations that apply to lending are listed here. For more details, see Bank regulation.
Other related topics include:
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This glossary post was last updated: 1st May, 2020 | 14 Views.