Mastering the Art of Risk Management in Digital Lending Workflows

When it comes to lending, risk comes in many forms – from operational to credit to regulatory. Between the various compliance requirements financial institutions must adhere to and the current economic hurdles many borrowers are facing, it’s important for banks and credit unions to have the right processes in place to manage all types of risk.

The good news is, technology can make it easier to get ahead of risk and ensure strong portfolio performance while complying with all necessary regulatory requirements. Many community banks and credit unions have already embarked on digital transformation initiatives to modernize the lending experience – from accepting loan applications online to supporting faster underwriting. As more financial institutions embrace digital tools to drive loan growth, there is an opportunity to enhance risk management as well.

When digitizing the lending process, financial institutions should identify all areas of risk – from operational to credit to regulatory – and find ways to automate risk management. This blog will outline exactly what bank and credit union leaders should consider to minimize exposure to risk in their digital lending workflows.

Managing Compliance Requirements

Financial institituions are shouldered with ensuring their operations and lending workflows follow a multitude of regulatory requirements. The list of regulations that require monitoring is long: Reg B, Reg O, Reg Z, AML, and more. To add to the compliance complexities, the nature of each regulatory requirement can change as the situation and terms of the loan change.

For instance, Regulation O requires that banks report any extensions provided to insiders in their quarterly reports. The good news is modern lending software, such as Baker Hill NextGen^Ò can indicate whether a loan application belongs to a Reg O and reports can be pulled to indicate Reg O requirements apply.

Another regulatory requirement, the Service Members Civil Relief Act (SCRA) covers all active duty military members, reservists and members of the National Guard. SCRA provides protection for commercial loans for six months after a member completes their military service and Baker Hill’s software is able to automatically indicate whether SCRA applies to a particular loan.

There’s also compliance with the Office of Foreign Assets Control (OFAC) which requires organizations to identify whether or not any parties involved in a transaction are on a watch list maintained by OFAC or the Department of Treasury. Baker Hill makes compliance easier by determining whether OFAC has been checked within the loan origination system.

To ensure compliance with the Bank Secrecy Act (BSA), modern loan origination software like Baker Hill NextGen® can attach beneficial ownership documentation into the system for each entity. To protect loan applicants from discrimination, Regulation B of the Equal Credit Opportunity Act (ECOA) requires all lenders to provide decisions and explanations to borrowers within 30 days of receiving a completed loan application. Baker Hill supports compliance by ensuring the decision is provided within the 30-day timeframe. There’s also compliance requirements for the Community Reinvestment Act (CRA) that mandates banks report loan and revenue amounts of $1 million or less. Baker Hill reduces regulatory risk for financial institutions by automatically identifying small businesses with $1 million or less in revenues.

With software like Baker Hill NextGen®, which integrates with Compliance Systems’ documentation prep solution, financial institutions can leverage a complete, end-to-end solution that manages the entire loan process while simplifying compliance. Together, these systems ensure each document adheres to federal and state-specific compliance regulations by automatically assembling the correct forms for a given transaction, reducing your financial institution’s risk exposure for virtually any type of loan.

Managing Credit Risk

The risk of non-compliance is not the only risk banks and credit unions should be wary of, especially in today’s economic climate. Banks and credit unions must closely monitor their portfolios to understand when they’re exposed to added credit risk that may negatively impact portfolio performance or exceed their institution’s risk tolerance. There are several indicators to watch for, including total exposure, loan covenants, loan or credit risk rating, credit memos and document tracking.

With software like Baker Hill NextGen®, banks and credit unions can streamline and enhance their portfolio risk monitoring processes. This helps institutions better manage risk and overall portfolio performance, while also proving they have a real-time view of their portfolio to regulators.

Choosing the Right Fintech Partner

When digitizing lending processes, it is important to develop workflows and program rules to automate risk management in a way that adheres to both internal controls within the financial institution and all appropriate regulatory requirements.

From identifying loans subject to Regulation B to managing important loan documentation requirements, there are many areas in the lending workflow that your financial institution can streamline with the right digital lending tools. Managing lending workflows is not for the faint of heart, but a modern loan origination system like Baker Hill NextGen®, can help minimize risk and maximize compliance.

To learn more about how Baker Hill NextGen® reduces risk, check out our case studies with Pioneer Bank and Global Credit Union.

Author Bio

As a Senior Business Process Architect, Julia works with clients to develop best practices and strategy to get the most out of Baker Hill's products and services. Julia has 26 years of banking experience in all aspects of lending, process improvements and system implementations while maintaining all necessary compliance and risk requirements.