Managing Risk in Digital Lending

Managing Risk in Digital Lending

Managing a lending process is not for the faint at heart. No matter whether you work for a bank or credit union, regulation of the banking industry comes with lots of 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 origination to servicing these loans, there is one common theme: risk is everywhere. Technology partners, like a loan originations system, can help to manage that risk with a transformation from manual to digital. 

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 in the processes for managing clients, their loans and deposits while adhering to regulatory guidelines. When digitizing your banking process, it is important to identify areas of risk and program rules to automate the management of it. 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 that can be easily monitored with the right technology partner. 

When identifying the potential cost of a technology partner, consider the cost of the risk involved and the breakdown of the processes inside your institution. From potential loss from failure to follow procedure (fines) to the time team members take to manage that in its manual state today (per hour cost) and you could have a larger return on investment just by investing in technology. Don’t forget the time it takes you to prep for audit or even investigate or fill out the operational risk event form for your risk officer. 

Credit

Potential portfolio loss from borrower’s failure to repay

One of the largest concerns with every institution right now is credit risk. With borrower’s potential failure 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, helps teams manage the loans on the books real time to be more proactive than reactive. Imagine logging in to a lending platform and having a holistic view of all loans on your books, from 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 viewpoint of your portfolio. Additionally, as regulators have indicated in the world we live in today, 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 the changes and how they affect the banking processes. No matter what regulatory agency you report to, financial institutions are shouldered with ensuring their processes follow the requirements laid out by laws put in place over the years.  The alphabet of regulations that requiring monitor 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 the silent killer for financial institutions. From regulators releasing reports indicating unfavorable reviews in lending processes to failure to respond quickly, these areas should be treated with just as much consideration as other risk areas. 

By investing in new technology (digitizing the lending experience), banks can enable clients a secure and easy way to provide real time assistance. This has been key in enhancing grow wallet share for most institutions. Being able to allow your clients to apply for new loans, inquire into the loans in process, decisioning loans quickly, and delivering the decision and or next step is on 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 resulting in reputational risk. Word of mouth can catch on fire just as quickly as an article released in the media airing an institution’s dirty laundry.  

The constant theme throughout here is process, data, and organization. Many financial institutions have had the unfortunate impact this past year learning about decentralization of the lending process. 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 they should as well as helped identified the areas that they can do 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 brighter better solution for our clients.