KEEPING UP WITH the swarm of regulations that encompass banking can be a mind-boggling experience. Perhaps nowhere is this problem more acute than in the mortgage lending process, where a typical consumer transaction can generate a pile of forms an inch or two high.
So when bankers at Planters Bank and Trust Co. of Virginia, in Staunton, Va., saw an opportunity to automate documentation and regulatory compliance procedures associated with their mortgage origination business, they seized it.
The result: over the space of two years, the $320 million-asset bank was able to more than triple the number of loans it closed without having to add a single new staff member.
"It has enabled us to become more efficient and proficient at what we do without having to add staff," said Planters vice president Larry Staples in discussing the bank's loan documentation platform system.
And what Planters Bank is proficient at is originating mortgage loans, note Mr. Staples and George Ballew, assistant vice president. Once booked, the loans are sold off to investors in the secondary market. Last year the bank originated 480 loans, up from 427 in 1992 and 145 in 1991. During 1993 alone, income associated with mortgage originations grew by $90,000, thanks to a general increase in business and the bank's ability to efficiently handle that increase.
The 1992 installation of a system that could automate the loan origination process and ensure compliance with all applicable laws and regulations came just in the nick of time for Planters Bank, as it found itself facing the wave of refinancings that struck mortgage lenders everywhere in 1993.
The automated system, called Laser Pro, was developed by CFI ProServices Inc., Portland, Ore. The system runs on a network of personal computers linking 16 loan originators in 10 bank offices. Rather than shuffling mounds of paper, a loan originator simply responds to a series of on-screen questions concerning the nature of a loan and the individuals requesting the loan; the software does all the rest. All the necessary forms and disclosure statements are generated using a desktop laser printer, ready for the borrower to sign or take home.
Everything Planters Bank needs to process the loan is sent via computer link to the bank's service bureau, AT&T Global Information Solutions, Dayton, Ohio.
Some of Planters Bank's loan originators work from their offices. Others take laptop computers into the field, entering details from a realtor's office, borrower's home, or the for-sale property, then dialing into the bank's local area network to start the forms generation process. The key, Mr. Staples said, is the flexibility and ease of use Laser Pro offers.
Laser Pro is so simple to use, he said, that experience ceases to be an important consideration in determining who takes a loan application.
"You can take a loan officer with less experience, and this system can pretty much walk that person through the proper production of loan documents," he said.
Laser Pro builds on the accumulated knowledge of scores of lawyers and bankers to help ensure lenders don't forget any of the forms, disclosures, or calculations required by federal or state regulations, or by the added requirements of the secondary mortgage market.
The stacks of documents a mortgage lender must deal with each day are large and growing. Forms triggered by the typical loan application process, noted Mr. Ballew, total upward of 30.
"And every year it seems like they add one or two new forms," he said.
To complete these forms, said Mr. Ballew, it used to take more than two hours for each applicant; now the process can be wrapped up in an hour or less. And there is no longer any need to store boiler-plate forms -- which routinely become outdated -- at the bank, since Laser Pro generates all necessary forms at the push of a button.
The chief selling point, though, was Laser Pro's ability to help the bank avoid potentially costly mistakes, like forgetting to provide borrowers with necessary disclosures and related forms, or misquoting loan rates.
"We were concerned that the way the laws are and the way they change that trying to keep up with this manually was too much of a risk," said Mr. Staples. "What we wanted was a system that when we're doing a loan would tell us if we were missing something."
Before 1992, Mr. Staples said, Planters' loan originators relied on checklists to guide them through the application process. And although audits and regulatory examinations failed to uncover any mistakes during those years, the potential for mistakes certainly made bank executives nervous.
Given the expansive nature of laws and regulations, it's little wonder. The past 25 years have seen a steady stream of state and federal rules governing the consumer lending process. And although only some of these regulations have targeted mortgage lending, the process has become burdensome enough to force some lenders out of the business, or to at least scale back on the mortgage products they offer.
Statistics are hard to come by, but the American Bankers Association has evidence that some lenders, particularly smaller banks, have dropped at least some loan instruments -- most notably adjustable-rate mortgages -- because of the compliance burden.
A 1993 report prepared for the University of Wisconsin drives home the cost implications of the current regulatory environment. Based on a survey of 445 banks, the report's authors estimated that the costs of complying with consumer protection regulations amounted to nearly 19% of the banking industry's net income in 1991. They said that 60% of that cost was incurred in complying with the Real Estate Settlement Procedures Act, Community Reinvestment Act, and Bank Secrecy Act.
Regulatory compliance is "a major part of running a bank," observed Steven Zeisel, senior counsel with the Consumer Bankers Association.
"It's not a money making part of the business," he said. "It's a major cost center."
"I cannot imagine how a bank of any size can succeed without automating and controlling the process of lending," added Matt Chapman, CFI's chairman and chief executive.
For a small financial institution, the difficulties are glaringly apparent, he said. "There is absolutely no way that a small institution can afford to be in compliance."
CFI has spent millions of dollars developing a data base of state and federal loan documentation requirements, Mr. Chapman said. And it operates a network of lawyers and a banker hot line that allows it to keep up with changes in those requirements. With more than 2,000 financial institutions licensing Laser Pro, CFI is able to spread the cost of accommodating changes in rules and procedures across a broad universe, he said.
For Planters Bank, the cost-sharing has resulted in both staff savings and new income opportunities. For example, its compliance officer still has other banking responsibilities. "We never did have a full-time compliance officer," Mr. Staples said. "Without this system I'm sure we would have had one by now."
On the revenue side of the business, Planters Bank has tapped into a lucrative new source of income: the preparation of loan-closing packages. Last year alone, noted Mr. Ballew, Planters Bank brought in $22,000 in new income preparing the closing packages on its loans. Before Laser Pro, the bank had to turn that process over to the investors who were purchasing its loans, which cut by about seven days the amount of time the bank had to prepare a loan. Typically, it takes at least five days to put together a mortgage loan closing package.
"It has had a twofold effect," said Mr. Staples of the move to closing-package preparation. "It has created a larger window of time in which to lock in a loan and it has increased our income."