2018 was a difficult year for loan originators. According to one study, cycle times increased while refinance volume decreased. As a result, loan origination costs rose to $8,957 per loan. With the competition over new borrowers intensifying, its critical to for lenders to mind and manage the right KPIs.
Streamline the Loan Pipeline By Watching For the Right KPIs
While the obvious, traditional metrics are below, more and more, you’ll find lenders investing in smarter technologies to accelerate and simplify borrower’s customer journey.
1 Pull Through Rate
This KPI measures pipeline efficiency by dividing total funded loans by the number of applications submitted during a defined period. This metric provides important insights into workflow efficiency, the quality of applications submitted, level of customer service, interest rate competitiveness and the suitability of a potential customer’s profile.
2 Decision to Close Time Cycle
The decision to close time cycle provides information about the number of days required to close and fund a loan after the underwriting decision has been made. This KPI provides insights about how efficiently a lending team is coordinating origination efforts with loan officers.
The average loan cycle time can vary but is typically up to 1 week. While lenders are investing in automated quoting system, close time often depends on customer interactions. Long cycle times can be the result of redundant touch points and unclear communication between loan support, loan officers and borrowers.
3 Abandoned Loan Rate
One recent survey found that application abandonment rates have shot up by 35% over the past two years. Abandoned loan rate measures the percentage of loan applications that are abandoned by a borrower after they have been approved by the lender. There are several common reasons for a high abandoned loan rate, including a lack of transparency between lender and prospective borrower during the approval process, failures in completing necessary forms, collecting documents, signatures, and inefficiencies within the application review and approval processes.
4 Average Origination Value
The average origination value measures the total revenue earned for each loan over a given time. This KPI combines origination and underwriting fees, as well as any other fees that are added to revenue. If this KPI is low, this could be indicative of a low average value of loans originated or origination fees that are below accepted industry standards.
5 Application Approval Rate
In October 2018, small business loan approval rates from banks reached a record high. One reason for this is the implementation of increasingly precise KPIs like application approval rate. This metric is calculated by dividing the amount of approved applications by the amount of submitted applications.
A low application approval rate means that a lender is investing too much time and money on unqualified borrower applications. Loan pipelines with a substandard application approval rate can be expedited by streamlining the document gathering and review processes.
*KPIs continue below quiz
How Ready is Your Loan Application Process
6 Net Charge-Off Rate
The net charge-off rate is the the difference between gross charge-offs and any subsequent recoveries of delinquent debt. This KPI effectively represents that amount of debt a lender believes it will never collect compared to average receivables. Debt that is unlikely to be recovered is often written off and classified as gross charge-offs. To calculate the net charge-off value, any money that is eventually recovered on a debt is subsequently subtracted from the gross charge-offs.
7 Customer Acquisition Cost
This key financial measurement is the ratio of a borrower’s lifetime value to a borrower’s acquisition cost. These costs include but aren’t limited to research, marketing and advertising. Ideally, the customer acquisition cost should be greater than one since a borrower isn’t profitable if the cost to acquire is greater than the profit they will bring to a lender. This KPI is used by lenders to help determine how much of its resources can be profitably spent on a particular customer
8 Average Number of Conditions Per Loan
This KPI is especially relevant for lenders seeking to enhance their CX. According to the International Monetary Fund (IMF), the average number of conditions per loan is 26.8. And this study by the IMF also found that the number of conditions on loan applications is increasing. The loan application process is hindered by a proliferation of conditions, adversely affecting a lender’s ability to provide a fast and seamless customer experience.
The KPI-CX Connection
Loan offerings have become increasingly commoditized. As a result, simplified, easy processes and experience are rapidly becoming the new key differentiators. CX is set to overtake price and product as the most important brand differentiator. However, even though 90% of borrowers want agent-assisted interaction, only 35% are “highly satisfied” by their experiences.
As such, lenders who develop a deep understanding of their loan pipeline and their teams’ performance are much more likely to streamline customer-facing processes. And the right KPIs can guide decision-makers on where to focus their efforts to enhance the customer journey.
What gets measured gets improved. Lenders who harness the insights provided by the above KPIs will more effectively manage process flows and operations. The result: increased sales, conversion rates and customer satisfaction levels.