WHEN CANADIAN Imperial Bank of Commerce instituted a mandate for change, it decided it needed a consistent risk analysis procedure for evaluating its commercial loan applications.

The bank, which ranks 50th in the world in terms of assets, decided to streamline the lending process by reducing the amount of paper it was handling.

The solution was to purchase an expert loan system.

"The bank decided that it needed to install a system that would allow us to risk-rate and provide us a window into the data to see how the rating was processed," said Michele Des Roches, manager of credit quality and portfolio management at the Toronto-based bank.

"We also wanted a product that had functionality to extract data for portfolio management purposes."

What the $107 billion-asset bank found was a product called Lending Advisor, which is marketed by Crowe Chizek & Co., South Bend, Ind.

A so-called knowledge-based expert system, it has all of the information needed to meet the guidelines as determined by the bank to help in the commercial loan decision process. It guides the lender through the process of evaluating the creditworthiness of a commercial borrower.

Although the bank operates more than 1,400 branches worldwide, the Lending Advisor software is currently being used only in Canada.

That's because the Canadian offices are directly linked to the bank's mainframe, while offices outside of the country are not.

Account managers are able to input loan information directly on-screen while they meet with customers. The information is entered through personal computers with screen prompts that speed the process.

By linking the system to the mainframe, the bank is able to access information throughout all of its locations across Canada electronically instead of having to move the paper from one location to another.

Once the information is entered in the system, Lending Advisor scores the data either negatively or positively depending on the creditworthiness of the application, and provides the lender with a bar chart that displays the strengths and weaknesses of the loan.

"The system is being used as part of an integrated process for loan approval; it does not operate solely for crunching numbers but involves a complete thought process," said Ms. Des Roches.

"It prompts the account managers to gather information on the industry risk and the strength of management.

"Account managers are required to think about the other risks associated with the loans as opposed to just the numbers from the financials," she continued.

The use of expert systems provides banks with the ability to improve service because loan information is always available on demand, said Robert E. Moll, a director at Arthur D. Little Inc. in Cambridge, Mass.

"It allows the lender to look more professional to the clients because it provides insight into the loan as well as servicing information quickly," he said.

"Expert systems help the institution look better because of the level of analysis and service it can provide. It makes the bank look like it is smarter then the rest of the competition.c

Canadian Imperial Bank of Commerce is using the software for commercial loans primarily in the manufacturing and service industries.

The average line of credit the bank extends to its commercial customers is about $4.12 million.

To date, the system the bank is using is not capable of handling real estate loans.

The bank does not rely on the system to make a final decision on the loan application, but takes the information and uses it as part of the process.

"People are still required to make the ultimate decision," said Ms. Des Roches.

"The system is just a tool that puts all of the information in perspective and packages it.

"If a rating comes out negatively, a human has to look behind the rating to see why. If the problem has been mitigated, the loan should be approved," she continued.

"It is just a tool that helps us make an educated decision."

Along with providing risk assessment, the system is also helping to make the process paperless.

Although management still requires applicants to include a hard copy of their financials, the bank has been able to take 80% of the paper out of the process.

"The system has allowed us to be able to see the same files electronically throughout our entire operation without moving the paper back and forth," said Ms. Des Roches.

"It has allowed us to do more in-depth analysis of the applications."

Recently, the bank created a data base of loans generated with the use of Lending Advisor and its classified loans to compare the two groups and see if there are any commonalities in the loans that have gone bad.

The key to the comparison is to determine if any trends have developed.

The bank has worked with the software developers to customize the program to handle the exact tasks the bank needs for the application.

It is exploring the possibility of installing industry-specific analysis modules, which will allow it to look at particular businesses more closely.

Currently, the bank operates the system in a DOS environment running on 286-based personal computers.

Plans call for the system to run in an OS/2 environment once the bank completes an update of its personal computers to 486-based machines sometime in the fall.

By using the system, the bank frees its lenders from paperwork so they can meet with prospective clients rather than sitting in an office.

"We are trying to get people to use the system as part of their relationships with customers," said Ms. Des Roches.

With the installation of the next generation of Lending Advisor, the bank plans to expand the role of the system to include report creation while making the data more available to users.

"It will be a lot easier to use once we switch from DOS to OS/2," said Ms. Des Roches. "By putting it into the OS/2 environment, it will be more user friendly."

Starting in the fall, lenders with laptops will be able to take applications at clients' offices and access the system.

"We will be able to take a laptop to the customer and be able to work with them to service existing loans and take applications," said Ms. Des Roches. "By adding this feature we should be able increase the size of the portfolio as well enhance our ability to service customers."

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