This article describes the most important KPIs (key performance indicators) to understand and target when you are trying to optimize the processes in loan origination. More generally, it illustrates how you should best think about KPIs for any significant process you are trying to optimize – account opening, claims processing, accounts payable processes, etc.
Let’s talk about a typical large bank. It may have 60 thousand loan applications over the last year, with an average cycle time of 10 days. The applicants withdraw or abandon their applications at a rate of about 17%. There may be some process automation of around 20% -- not good -- with a rework rate of about 50% -- even worse!
So what is loan origination senior management interested in as their KPIs? Here I’ve listed some of the most important KPIs and I’ll explain them briefly.
Pull through rate is pipeline efficiency – it measures the total funded loans versus the number of submitted applications during a time period. In terms of process execution problems and causes, it indicates workflow efficiency, quality of applications, level of customer service, and the suitability of a potential borrower’s profile.
Abandoned Loan Rate measures the percentage of loan applications that are abandoned by a borrower after approval. It indicates the lack of visibility between lender and borrower during the approval process, failures in completing necessary forms and collecting document and signatures, and inefficiencies in the review and approval process.
Application Approval Rate measures the number of approved applications divided by the number of submitted applications. This primarily indicates where the lender is investing too much time and effort on unqualified borrower applications. Loan pipelines with a substandard application approval rate can be expedited by streamlining the document and information gathering and approval process – which in turn is helped or hurt by interactions that move the process along, collect information about the borrower, and filter out the Jesse Pinkmans early and quickly.
The Most Important KPIs Relate to Time
While the KPIs mentioned above are important, the MOST important KPIs relate to TIME. Time to apply, to approve, to close, and to fund. Why are these the most important loan process KPIs? If you improve them, you improve the other KPIs. For example, if your decision to closing cycle is fast, the borrower doesn’t have time to be dissatisfied or abandon the loan!
These time-based loan process KPIs are also easy to measure how well your solutions are working or not. The problems are the efficiency of customer interactions, redundant touch points, and unclear communication between the bank and borrowers, and the other problems I mentioned. You fix it by improving coordination, visibility, and communication between internal parties and between them and the borrower.
Digitization and Automation Can Dramatically Improve Speed – and the Other KPIs
You can dramatically improve loan origination process speed – along with quality, coordination, visibility, and customer experience -- with a handful of technologies applied in proven ways. These digitization and automation technologies include intelligent document capture, case management and document tracking, and a well-organized document repository.
Let’s look more closely at the loan origination process to see how these digitization and automation technologies can be applied.
During Loan Application, Intelligent Capture and E-forms can be applied:
Online loan process forms initiate the process and collect customer information
Data and documents are classified, extracted, validated, and delivered to the right systems and teams
During Approval, Workflow can be applied:
Workflow provides Process Automation, Case Management and Document Tracking
A loan “case” is created in workflow along with checklist of required documents and tasks
Tasks and documents are tracked and logged – and checked for compliance at each step
Processes are managed, coordinated, and automated where possible
During Closing, both Intelligent Capture and Workflow can be applied:
Workflow continues to manage processes from Application through Approval and Closing
Intelligent Capture continues providing upload, import (from the loan origination system), and intelligent document processing
During Funding, Loan Document Generation can be applied:
Workflow indicates required documents to prepare and assemble
Workflow and Document Generation tools manage author-review-approve process
Documents are delivered electronically or physically, reviewed, and signed
The Best Time to Get Started?
To appropriate a well-known saying: The best time to start improving your loan process was yesterday; the second-best time is today.
Business processes are often in flux – new products, new technologies, and other improvements should change the way business processes work. Too often, we see companies in “set it and forget it” mode when it comes to their processes. We find lost opportunities for clients in their processes. There’s no reason to delay.