Credit Origination

From Open Risk Manual

Definition

Credit Origination is the process by which a lender or other credit granting institution approves for a new credit product or exposures (such as a new loan, mortgage, credit card etc) and performs initial processing. Origination starts with an application from a new or existing client and (for approved transactions) ends with the remittance of any upfront monies and the integration of the new exposure into the existing Credit Portfolio. The precise steps involved in credit origination will vary by market, product (including whether it is secured by collateral, the size of exposure etc).

Also Credit Underwriting

Elements of the Credit Origination Process

The decomposition of the credit origination process depends heavily on client, product, market structure and other general factors (regulation). The following components outline the main items usually present (we ignore here issues such as customer identification and KYC regulations)

  • A suitable application channel where a transaction can be initiated (Physical branches, online applications, peer-to-peer markets, syndication markets etc.)
  • A Credit Application Process whereby a client requests credit and provides required information (in paper or digital format)
  • Credit Evaluation, whereby the lender analyses a proposed transaction by processing the available information and decides on accepting or rejecting
    • Collateral Appraisal (where applicable)
    • Credit Pricing, whereby the lender decides on proposed lending rate or credit premium
    • Credit Structuring, whereby the lender may adjust further elements of the proposed contract (clauses)
  • Closing Document Preparation whereby the lender prepares and presents to the customer the proposed contract
  • Funding, whereby the lender credits the client account with funds, books the transaction within their own systems

Issues and Challenges

  • For firms funded by debt or deposits the nature and quality of the credit origination process may have significant repercussions for the risk profile of such liabilities
  • Acceptance criteria and associated filtering processes embedded in credit origination may have implications for financial inclusion
  • In a Securitisation context, the underlying exposures in portfolio need to be underwritten based on similar underwriting standards which apply similar approaches to the assessment of Credit Risk associated with the underlying exposures

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