Firms like Provident are increasing loan volume, workforce efficiency and customer service by introducing straight-through processing to all aspects of the loan process

Bank Technology News  |  February 2005

By Shane Kite

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Banks have made great strides in automating underwriting to speed the delivery of consumer loans. Most now provide decisions on car or personal loans within minutes, as branch reps enter data into Web-based interfaces that ferret customer credit histories, income and calculate terms.

But origination is only the first stage in automating the overall underwriting or loan processing practice. Experts say the key to achieving straight-through processing (STP) in consumer lending divisions and mitigating default risk hinges on the bank's ability to seamlessly connect more recently developed origination, underwriting and processing platforms to older commercial or legacy servicing engines.

Lee Kidder, a banking analyst at TowerGroup, says banks should use the same platform to perform origination, underwriting and servicing, though few do. The "ideal end point," he says, is seamless processing across divisions, which involves linking loan processing applications and other channels, like online banking, into a single enterprise platform, or "backbone," to better manage business intelligence and boost customer cross-selling, he says.

The task of creating faultless middleware interfaces between origination, underwriting and servicing modules, though, has proved difficult. Kidder calls it the "spaghetti works behind the curtain." "The middleware that does all this integration does a pretty decent job," he says. "However, you've got multiple systems needing their own data sets, databases, maintenance and expenses. So yeah, it produces the result you want, but it's very complicated and expensive to maintain, much more so than a streamlined and consolidated platform from one vendor."

Chuck Mazza, vp of consumer lending at Provident Bank in Woodbridge, NJ, says his bank has found a way to handle an increased workload after automating under a favorable rate environment. The bank has boosted its loan production over the last two years without increasing staff, which he attributes to an origination application installed early in 2003 called CrediSphere from Fairport, NY-based X/Net Associates, which was acquired last year by S1. Volume increased 50 percent from 2002 to 2003 and another 20 percent in 2004, with the amount of processed applications rising from 4,400 to 12,000 over the same time period.

CrediSphere offers on-line access to credit scoring databases like Fair Isaac's or consumer reporting bureaus like Experian; it also provides access to automated modeling for pricing, or help in deciding whether to approve, or underwrite, a loan. "Customers can come in and apply for a loan on-line with one of our branch personnel and get a decision, close the loan, and get the check right then and there," Mazza says. "It's a matter of minutes for them to actually close on the loan."

Automating with Credisphere has made a "night and day" difference regarding achieving efficiencies on the front lines at Provident. "We can actually have our branch personnel handle the input, the disclosure of the application, and the closing. You don't have to hire the additional staff at a central location to perform those same duties," Mazza says. "You already have those people on the payroll."

Yet such advantages decrease as soon as CrediSphere hands off credits to the next stage of the loan lifecycle. Provident's loan servicing staff still must manually load the 700 to 800 loans they receive each month onto Horizon, an older, core banking mainframe from Fidelity Information Services, to manage payments.

The linkage between CrediSphere and Horizon was expected to take some full-time employees off the servicing line. Thus, staff would be freed from their duty manually entering the loans. The pledge has yet to be fulfilled. "We've had a bunch of glitches in the process, which primarily resided with Fidelity," Mazza says. "The mapping seemed to be the issue."

Vendors typically review each other's programming documentation and decide how to link up their systems. S1, Fidelity and Provident's in-house computer support team agreed the linkage, which Mazza describes as an "LNO3" interface, "should not be an issue," he says. But when it came online and they tried to download, it rejected the transaction.

The bank has since been working to fix the problem and was testing the interface at press time. Mazza says he expected the connection to be up and running this month [February]. "Once it's functioning, it's going to mean tremendous efficiencies on our servicing staff, because it'll be just a push of a button on a daily basis, so there's just a [quality control] process."

According to Kidder, Provident might benefit long-term from X/Net's being owned by Atlanta-based S1. The enterprise system vendor has been working at building out a multi-channel banking platform, called S1 Enterprise. CrediSphere added a lending piece to the platform's other modules, which include on-line banking, cash management and trade services.

Firms like S1 or Costa Mesa, CA-based FileNet may seek to offer front-to-back loan processing to replace mainframes or core accounting engines like those from AFS, Metavante or Fiserv by creeping module-by-module across the enterprise and into the back office.

Provident has yet to tap S1 for any products. But these kinds of business process or integration systems providers are the ones most likely to challenge incumbents.

For Mark Hammer, vp and retail credit manager at Tri Counties Bank, X/Net's best quality has been its flexibility. The Chico, CA-based community bank consolidated its consumer and small business lending onto CrediSphere, replacing Fair Isaac's CreditDesk for consumers and Baker Hill's Bank2Business.

CrediSphere also enables the bank to download data into SQL database tables to build proprietary production, sales, pipeline and override reports. "That's the evolution," Hammer says. "Maybe 10 years ago you would get a pretty vanilla product based on some very limited management parameters, and the Wells Fargos and Bank of Americas of the world would hire Fair Isaacs and build a proprietary application processing system that would give them all these advantages. Now we have the flexibility of adjusting our management parameters on a much finer level."

Automating has allowed PMI Mortgage Insurance Co., which offers "contract" or outsourced underwriting to lenders, to do more with less. The Walnut Creek, CA-based mortgage insurer has integrated Loan eXpeditor from Troy, MI-based Pyramid Solutions with FileNet's business process manager. PMI uses FileNet's workflow interface to route loans that need representations or warrants within offices or among branches. Loan eXpeditor takes digital images of loans lenders fax the firm. PMI deployed the system in July last year just as the housing boom was tailing off, and the firm was consolidating its offices from 18 down to eight.

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