Loan operations offer big opportunities for reengineering.

FINANCIAL EARNINGS Group recently helped a major Southeastern bank reengineer its loan operations. With eight decentralized loan centers, the bank was piling up paper and needed better communication among its branches, especially when providing loan documentation.

The information solution included storing microfilm images of loan documents along with retrieval equipment equipped with fax-back capabilities. In addition to reducing a forest's worth of paper, the bank enjoyed a 27% increase in overall efficiency in loan operations and reduced full-time staff by 20 employees.

One would think that after hundreds of years of lending by banks, loan operations would have been perfected by now. To the contrary, loan operations offer significant opportunities for reengineering at every stage.

Many banks still view loan operations as little more than a shuffling of paperwork to complete a loan package for filing in the vault. And, loan operations are an extremely paper-intensive exercise because of the vast amount of documents required for completing a loan file. Most banks have focused primarily on organizing documents in an ordered fashion. The results are large filing operations that retain tons of paper and require a significant amount of space.

Financial institutions have numerous approaches for handling large volumes of paper - ranging from the simple filing of loan files by date order to the replacement of documents with microfilm or stored images on optical disks.

Within the past several years, technology systems have been developed that permit banks to reengineer file access. One employs barcoding in conjunction with color coding. This improves traditional methods, automating placement and tracking loan files using a PC and wand reader.

These filing operations normally use alphabetical or numerical formats, and are implemented to satisfy a highdemand retrieval rate. However, our reviews show the majority of paperwork stored in a loan file is seldom retrieved, and usually only in cases of losses in past-due loans that need to be charged off.

Date filing's advantage is that it entails little installation expense and no hardware requirements. Filing by date order differs from traditional numerical or alphabetical ordering. Since most loans are time sensitive (30-year mortgages, three-year car notes, etc.), filing by date provides quicker retrieval and improved index systems. The disadvantage, however, is the financial institution is still left with a large manual filing operation.

Microfilm can be built around the date filing concept. Hundreds of documents and files can be stored on a single roll of film, reducing paper and expanding filing capabilities. In addition, when compared to image technology, microfilm is far less expensive to implement.

Microfilm, though, does mean an initial investment in equipment and will require a manual filing operation for storing and retrieving film.

Image technology is an increasingly popular approach for storing loan files. Like microfilm, image technology converts loan documents into images. Instead of film, these images are scanned by computer and stored on optical or magnetic disks. The disks are accessed via a terminal in a PC-based system, calling up inquiries for file documents instantly.

Optical disk storage can be installed through local area networks, providing instant retrieval access to multiple processors, underwriters, and operators on the network. The system can also be set up in wide-area networks through which loan officers, either in branches or regional sites, can access loan documents from any connected site.

The advantages of image technology are many: virtual elimination of paper, instant document retrieval, and the elimination of manual filing operations.

The disadvantages of image technology are the costs associated with implementing the system. Even as it is becoming a widely used technology, banks and financial institutions must weigh the value of high-speed retrieval and optical storage against the needs of their loan operations.

In addition, many states have statutes prohibiting complete substitution of original documents with images stored on optical disk. This isn't new. Banks went through similar regulations concerning checks and microfilm. Check images stored on microfilm are now recognized in every state as legal documents, and as image technology proliferates, more states will modify their laws governing optical images.

Image technology and microfilm use are based on the assumption that all information on paper documents is necessary. A careful review of a financial institution's overall lending process will yield which documents are critical to a loan file for future storage.

Eliminating superfluous paper splits filing into critical and noncritical documents. Depending on a bank's loan operations, a combination of manual storage and microfilm or image technology can be implemented to cover the need to keep hard copies of critical documents and store noncritical documents.

Improvement in document handling and archiving is just one area. Other opportunities to improve loan operations involve outsourcing specific functions.

One example of this is insurance collection agencies' ability to match homeowner and automobile insurance records with company records at the time of renewal. When the match occurs, the company contacts the customer to ensure the property is properly covered.

The reengineering of loan operations also extends to collection functions. Loan collection technology ranges from intelligent workstations to automated call-distributing systems. These technologies can be designed to fit the specific size of a bank's collection needs, and should be reviewed carefully to determine the appropriate system.

An on-line network is necessary to tie all lenders together into the collection system. On-line systems provide the bank with more accurate reports for tracking the collection efforts of both the department and the individual loan officer. This technology can be combined with call-distribution systems that allow the host computer to download past-due files and other records to any on-line workstation.

In addition, call-distribution systems generate a constant number of calls to customers and match them with corresponding collection agents. These systems are dynamic and can adjust the daily call pacing automatically to maximize the number of "hits," or customer contacts. These systems can enable a collector to handle as many as 600 contacts in a day.

As with any reengineering effort, an overall strategy must include streamlining all functions in an operation.

Platform automation is another technology that affects loan operations. Documents and data are uploaded to a bank's host system, enabling front-end functions such as the setting up of loans and opening of documents to immediately be stored into the loan filing operation.

This can also be combined with image technology, uploading images such as loan documents, photos, and insurance forms into the host system.

The improvements a bank can realize by reengineering its loan operations - reduced dependence on paper and greater storage capabilities - are more than cosmetic. These technologies can yield bottom-line results in staff, overhead, and improved collections.

Don't underestimate the profitability to be gained in improving the total way your bank handles loans. Improving the spread isn't the only way to improve profitability.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER