A loan management system (LMS) is a software application designed to manage lending operations for financial institutions like banks, credit unions, microfinance institutions, and other lending organizations. An LMS automates and streamlines the entire lending lifecycle from loan origination to payoff.
Key Functions of a Loan Management System
Loan management systems have a wide range of capabilities to support lending activities, including:
Loan Origination
The loan origination module facilitates collecting loan applications, underwriting loans, approving/denying loans, generating loan agreements and disclosure forms, disbursing funds, and booking loans. Key features include:
- Online loan applications
- Integrated credit checks
- Risk modeling and decision tools
- Customizable workflows
- Automatic document generation
Collateral Management
Collateral management functionality tracks all assets and properties pledged as security for loans. This includes:
- Recording liens and security instruments
- Visualizing relationships between collateral and borrowers
- Managing assets
Loan Accounting
Robust accounting tools maintain all loan financial transactions over the full lifetime of loans with features like:
- Payment receipt and processing
- Billing and invoicing
- Escrow administration
- Interest accruals
- Automated delinquency status tracking
- Payment application and balancing
Customer Relationship Management
CRM capabilities nurture relationships before, during, and after the lending process:
- Single customer views
- Cross-selling and upselling offers
- Email and text communication tools
- Call logs, notes, reminders, and follow-ups
Reporting and Analytics
Embedded reports and analytical tools equip lenders to extract key insights from loan data to make informed decisions. Common reports include:
- Loan pipeline and performance reports
- Customer and portfolio analyses
- Delinquency analysis
- Transaction audits
- Regulatory and management reports
Additional Capabilities
Other features may include tools for risk modeling, forecasting, loan sales, investor reporting, document management, core integration, and more.
Core Components of a Loan Management System
Modern loan management systems are configurable platforms with different applications working together to support end-to-end lending. Core components include:
Loan Origination System (LOS)
The LOS application handles new loan requests, credit decisions, documentation, disbursement, and booking. Popular features help lenders process more deals faster while mitigating risk.
Collateral Management System (CMS)
The CMS tracks assets pledged to secure financing. Lenders monitor property values, insurance, legal status, environmental risks, and lien positions over collateral lifetimes.
Loan Servicing System
Servicing systems maintain customer accounts after funding. Key tasks include sending statements, collecting payments, administering escrow accounts, and managing delinquencies.
Workflow Management Tools
Dynamic workflows route tasks, track status, enforce business rules, and drive processes from application to closure. Workflows boost productivity and consistency.
Customer Relationship Software
CRM tools track borrower communication and engagement. Embedded offerings help convert more leads by nurturing relationships before and after funding.
Reporting and Business Intelligence
Robust reporting across lending processes gives stakeholders meaningful insights to guide decisions. Dashboard analytics identify opportunities and emerging risk factors.
Integrations with Core Systems
APIs, ETL tools, and connectors integrate LMS data with core banking, general ledger, credit, document management, and other solutions for a unified experience.
Buying Considerations for a Loan Management System
Important criteria to evaluate when selecting a loan management system include:
Cloud-Based Architecture
Cloud platforms lower technology costs while enabling accessibility. Assess scalability, resilience, security precautions, customization flexibility, regulatory compliance, and performance.
Digital and Mobile Capabilities
Evaluate mobile app and online portal experience for borrowers and lenders. Do they enable faster decisions and paperless processes? Can borrowers upload documents, eSign, and chat with agents? Do employees access workflows, analytics, and CRM tools from anywhere?
Configurability
Every lender has slightly different workflows, products, policies, and borrower interactions. Choose platforms with low-code configuration tools for unique processes without expensive custom coding projects.
Embedded Decisioning and Risk Models
To expedite underwriting and mitigate risk, prefer systems with built-in credit scoring, automated valuation models, risk analysis, fraud detection, pricing engines, and decision rules configurable to lending guidelines.
Interoperability and Extensibility
Assess underlying architecture and available integration tools to check if the LMS can interconnect with core banking systems, G/L software, documents management systems, credit bureaus, servicing platforms, and other solutions in your environment.
Reporting and Analytics
Robust, customizable reporting and analytics are imperative. Seek superior dashboard features, drill-downs to loan details, examination of metrics across portfolios, customer segments, loan types, and other criteria to glean insights.
Vendor Stability and Experience
Choose mature vendors with ample industry experience for dependable solutions and ongoing enhancements. Avoid risky or bleeding-edge players without solid business models and healthy customer bases.
Risk Management Capabilities
To help lenders manage portfolio risk, LMS platforms offer an array of capabilities:
Alerts and Early Warning Signs
Configurable rules trigger alerts for emerging portfolio issues, like higher collective delinquencies in a segment. Alerts also warn relationship managers to reach out to struggling borrowers.
Automated Risk Rating
Embedded risk scoring tools automatically classify loans or customers according to potential default probability for better tracking and reporting. High risk subsets warrant added attention.
Modeling and Forecasting
Robust analytics model performance scenarios over pipelines and portfolios by adjusting variables like default rates, prepayments, interests rate shifts, or collateral erosion from economic events.
Stress Testing
Stress testing measures portfolio outcome Given pessimistic assumptions to simulate unlikely but plausible events, like unemployment spiking, GDP slowing, or assets rapidly devaluing after a crisis.
Allowance for Loan and Lease Losses (ALLL) Methodologies
LMS guide lenders on calculating ALLL reserves to cover expected portfolio losses. Advanced systems estimate reserves needing data like PD, LGD, EAD, discount rates, and macroeconomic factors.
Loan Review and Audit
Scheduled loan health checks and robotic process automation audit files and loan details to verify policy compliance, catch errors, confirm terms match system parameters, and flag abnormalities for any corrective action.
Regulatory Reporting
LMS produce many common reports needed for agencies like the CFPB, state regulators, FinCEN, etc.