Managing Risk in Your Digital Lending Workflows
Managing lending workflows is not for the faint at heart. Whether you work for a bank or a credit union, regulation of the banking industry comes with many hurdles. While we understand why these regulations have been put in place, it makes managing the business, the risks, and validation of them cumbersome.
Risk comes in many forms: Operational, Credit, Regulatory, and Reputational. From loan origination to servicing these loans, there is one common theme: risk is everywhere.
Technology solutions, like loan origination software, can help manage that risk with a transformation from manual to digital. Read on for tips for managing risk while embracing digital tools and modern lending workflows.
Operational
Internal failures—people, processes, or systems
Banking regulation, as we know, drives processes and the programming of banking systems.
As an operations manager in any financial institution is aware, written procedures for team members to follow help ensure that all are educated on proper lending workflows and the processes for managing clients while adhering to regulatory guidelines.
When digitizing your digital lending process, it is vital to identify areas of risk and the program rules to automate its management.
From stopping a loan with real estate from going to documentation without final flood to identifying loans subject to Regulation B, or digitizing a pre- and post-closing checklist to manage the trailing docs—these are areas in the lending workflow that you can easily monitor with the right digital lending technology partner.
When identifying the potential cost of a technology partner, consider the cost of the risk involved and the breakdown of the processes and lending workflows inside your institution.
When you weigh the potential loss from failure to follow procedures (fines) and the time team members take to manage that in its manual state today (per hour cost), you could have a more significant return on investment just by investing in technology.
Don’t forget the time it takes in your lending workflow to prep for an audit or even investigate or fill out the operational risk event form.
Credit
Potential portfolio loss from borrowers’ failure to repay
One of the largest concerns with every institution right now is credit risk. With borrowers’ potential inability to repay, perhaps concentrations in your portfolio, as well as industries highly affected by COVID-19, credit risk teams are putting plans in place to set up monitoring and automation.
Digitizing the risk controls to help monitor credit and the portfolio allows teams manage lending workflows in real-time and be more proactive than reactive. Imagine logging into a lending platform and having a holistic view of all loans on your books, including paying as agreed, watch list loans, pandemic affected portfolio loans, concentrations, and more.
Having that single point to review, as well as indicators to be proactive, would help you better manage your portfolio and prove to regulators that you have a real-time view of your portfolio.
Additionally, it allows you to reach out and work with your customers early.
Regulatory
Constantly changing laws, regulations, and guidelines
With so many agencies and regulations to follow, most financial institutions have many people who monitor for changes and how they affect the banking processes.
No matter what regulatory agency you report to, financial institutions are shouldered with ensuring their operations and lending workflows follow the requirements laid out by laws put in place over the years.
The alphabet of regulations that require monitoring is long: Reg B, Reg O, Reg Z, AML, etc. Of course, each one has intricacies that change as the situation changes. As it is commonly said, “the only thing constant is change.”
Reputational
The good standing of a company or organization in the community
While reputational risk does not lead to an exact potential loss of income, this can be a silent killer for financial institutions. From regulators releasing reports indicating unfavorable reviews in lending processes to failing to respond quickly, you should treat these areas with as much consideration as other risk areas in the lending workflow.
By investing in a modern digital lending platform, banks can enable clients a secure and easy way to provide real-time assistance. This has been key in enhancing wallet share for most institutions.
Being able to allow your clients to apply for new loans, inquire into the loans in process, offer a faster lending workflow, and deliver the decision and or next step is at the forefront of consumers' minds.
Taking forever to decision a loan or not providing transparency into what is going on with the loan can lead to negative feedback in the community, which results in reputational risk. Word of mouth can catch fire just as quickly as an article released in the media airing an institution’s dirty laundry.
The constant theme here is process, data, and organization. Many financial institutions have had the unfortunate impact of learning about the decentralized lending workflows this past year.
With centralized loan centers being ultimately forced to work remotely, it changed the way companies work. Utilizing technology has helped keep the normal lending process flowing as it should and has helped identify the areas that could be better.
As with any situation that arises, take what we learned even as uncomfortable as it made us and let it help us grow into a better solution for our clients.
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Posted on Friday, January 29, 2021 at 2:45 PM
by
Jennifer Foraker
Author Bio
As the Director of Implementation Analysts at Baker Hill, Jennifer Foraker manages the team that implements Baker Hill NextGen®. She collaborates with clients and internal teams to give knowledgeable insights into Baker Hill NextGen® product capabilities and functionality throughout the implementation process. With more than 20 years in the banking industry responsible for both consumer and small business processes for banks of all sizes and previously serving as a Loan Operations Manager, Jennifer’s areas of expertise include small business loans, SBA lending, construction loans, operations management, regulatory documentation and portfolio management.