What is a Correspondency System?

Correspondency systems are methods of processing that are used by various types of loan correspondents to qualify, approve, and administer loans to applicants. Sometimes referred to as a bank agent program, a correspondency system provides a well-defined process for ensuring applicants meet the criteria established by the financial institution and also represent a good risk. The loan correspondent is authorized by the bank or other lending institution to act on behalf of the organization to approve and issue the loans, assuming the applicant is qualified.

The main advantage of a correspondency system is to protect the lending institution from loaning money to individuals or companies that do not present a reasonable ability to repay the loan plus any applicable interest. When a bank or similar institution does not choose to use a uniform method to determine the credit worthiness of applicants, the chances of a high percentage of defaults on approved loans is significantly increased. By putting into place a specific system for processing all loan requests and evaluating each request with established guidelines, the amount of risk can be greatly minimized.

At the same time, the loan applicant benefits from the use of a correspondency system as well. Along with determining the worthiness of the application, the correspondency system will often help to identify one or more loan structures offered by the institution that may be in the best interests of the applicant. The ability to affirm the credit worthiness of the individual and also offer two or more possible loan types can help to create rapport between the lending institution and the applicant.

Even if the correspondency system indicates the applicant is not a good risk, the correspondent normally is able to offer specific reasons for the decline of the application. This often helps the applicant to become aware of entries of the credit report that may be out of date, incorrect, or attributed to the applicant in error. From this perspective, the applicant benefits by having a focused list of credit issues that must be addressed before attempting to secure any further financing.