Loan origination-servicing boundary

Loan origination and loan servicing are the 2 main processes that lending software supports.

It's crucial to accurately model the boundaries between the two in the software design.

Why?

Because it improves software maintainability.

When the boundary matches the business domain, there are fewer dependencies between each part of the software, making it easier to separate concerns and evolve them independently.

But as an engineer, it may not always be clear where the line is between origination and servicing.

• Is it when the loan is disbursed, and the borrower receives the funds?

• Is it when the loan agreement is signed?

• Is it when the loan is booked into the accounting ledger?

• Is it when the loan is activated?

Where does origination end and servicing begin?

Loan agreement signed

What I found helpful in finding the boundary is the fact that:

A loan doesn't exist for most of the origination process.

Loan origination means the process of creating a loan. There's no loan until you make it.

So, when does a loan get created?

A loan is a financial agreement between a lender and a borrower that defines the terms on which the lender extends credit and the obligations of each side.

The lender is responsible for providing finance.

The borrower is responsible for repaying the amount, typically with interest.

And like most agreements, it's considered valid only after it's signed.

So until the loan agreement is signed, there's nothing to service.

Before a loan agreement is signed

Loan origination activities revolve around creating a new financial agreement:

• Collection application from a borrower

• Fetching data from external data sources

• Running fraud and compliance checks

• Assessing credit risk and making a credit decision

• Calculating credit limits and pricing

• Creating a loan offer and delivering it to a borrower

• Preparing a loan agreement and getting it signed

After a loan agreement is signed

If origination is about creating the financial agreement, then servicing is about fulfilling the obligations outlined in that agreement.

Obligation fulfilment starts with the lender disbursing the funds to the borrower.

Then, it continues with the borrower repaying the loan according to the schedule.

The lender sends notifications to the borrower to keep them informed and on track with the repayment schedule.

Additionally, a significant part of servicing involves accounting to track transactions and account balances.

Treating the point when a loan agreement is signed as the boundary between origination and servicing neatly separates concerns and helps create more maintainable lending software.

That's it for today.

I hope this gave you some useful ideas for building better lending software.

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