Argentbank, a community bank based in Thibodaux, La., has instituted an innovative approach to building an indirect-lending business.
To cost-effectively develop and maintain an indirect auto loan financing program, the $543 million-asset bank has employed the expertise of a leading data-processing company, Dallas-based Electronic Data Systems Corp.
The bank is one of the first to take advantage of EDS' new consumer-lending program, which goes beyond the traditional data-processing services the company provides to financial institutions.
This year, EDS acquired the consumer-loan services operations of Blue Bell, Pa.-based CLS Corp., the nation's largest independent consumer-loan servicer.
EDS incorporated CLS' Advanced Loan Servicing into its consumer asset-management division, based in Wayne, Pa. Advanced Loan Servicing enables financial institutions to outsource all or a portion of their consumer-lending operations to the company. As part of the program, EDS provides the necessary infrastructure, such as human and technical resources, enabling banks to get into the business "virtually overnight," said officials.
If desired, the company will handle the entire lending process, from loan decision making and document preparation, to collections and customer service.
The program also offers help to established lenders. EDS supports peak-processing needs, such as those following marketing campaigns, or periods of low interest rates.
Argentbank decided to use the EDS service because it "allows us to concentrate on managing the portfolio instead of the operations," said bank president and chief executive officer, Randall E. Howard.
Through Argentbank's indirect-loan service, local dealers submit loan applications from customers, and receive quick, sometimes on-the-spot responses, he said.
"We are the only bank in this region to use an outside resource, and are convinced that with EDS' expertise behind us, we can offer a valuable service to local auto dealers and their customers.," he said.
The indirect-lending business is not new to the bank. A program was initiated in the late 1980s, using a proprietary, inhouse system, said Carlos Alzate, indirect-lending manager and banking officer.
But, "because of the cost involved, it wasn't as profitable as we expected," said Mr. Howard. As a result, in 1990, the bank decided to stop taking loans, and it took four years to completely dissolve operations, said Mr. Alzate.
The value of the loans was up to $65 million when the bank decided to exit the business, said Mr. Howard. He said they wanted to get back into the indirect lending area, but they weren't sure how they would go about it.
EDS turned out to be the answer. The company was already doing all of the bank's data processing under a facilities-management contract.
Advanced Loan Servicing gave the bank the means to build an indirect-lending business without the need for an initial investment in infrastructure.
"The initial investment for equipment, personnel, etc., would have been $500,000 for the first six months of operations, before seeing any benefits," said Mr. Alzate.
The bank's relationship with EDS "allows our overhead to grow with our revenue," said Mr. Howard. "Before, we started with a high overhead, and hoped for our revenue to catch up."
Since EDS is doing all the processing and paper handling, the bank has been able to scale back its indirect-lending department from around 15 people, to a two-person operation, said Mr. Alzate.
To ensure consistency of loan processing, the bank supplied EDS with collection, compliance, customer service, and underwriting criteria, which EDS entered into its computer system. This consistency helps meet Community Reinvestment Act requirements, said Mr. Alzate.
The bank, which is working with 26 dealerships, took its first loan application on Oct. 1. Mr. Alzate said he anticipated doing 100 loans a month, a goal the bank was close to by mid-October.
Although the bank could do this kind of volume out of an inhouse, indirect lending department, the overhead and investment in infrastructure would be too high, said Mr. Alzate, and "would never be as efficient as EDS."
"With EDS, the process is so automated that we can speed up the background work and have a turnaround time of two hours maximum," he said. "Depending on the customer's credit history, this can be reduced to as little as 20 minutes. And, since each loan is analyzed using the same credit criteria, loan decisions are consistent." Mr. Alzate also said that the charges for the EDS service were fair.
"Ninety-seven percent of our costs with EDS are variable," he said. "If we make a lot of loans, we have a lot of expenses; if we don't, we don't." With an in-house system, he continued, "we would have had fixed costs no matter how many loans we made."
The bank pays $75 for each loan booked, and $12.50 for every loan application processed, whether it's approved or not. Based on these costs, and anticipated loan volume, Mr. Alzate said "we think it will be a nice yield."
The relationship with EDS also gives the bank a way to compete effectively against the large banks in the area -- Hibernia National Bank, Premier Bank, First National Bank of Commerce, and Whitney Holding Corp. - all of which run in-house, indirect-lending businesses, said Mr. Alzate. For EDS, the new service provides the company a way to serve not only the bank, but the bank's customers.
"Historically, the only time EDS has had an opportunity to participate in the consumer-lending market was as the data processor for financial institutions," said Ted Shaw, EDS division vice president. "Now we're growing beyond traditional boundaries."
Fifty financial institutions, including banks, thrifts, and credit unions, are using Advanced Loan Servicing, said Harry Weitzel, who heads EDS' consumer asset-management division. Twenty-eight banks are using the indirect-auto program, he said ....
Consumer lending is big business, according to Mr. Weitzel. Vehicle financing is a $250 billion industry. Second mortgage originations account for $125 billion to $150 billion a year in an overall market of $300 billion. Even manufactured housing, once considered a risky lending area, reports a finance market of $10 billion annually.
"We're trying to communicate to financial institutions that if they're not in these markets, they're missing out," Mr. Weitzel said.