Phoenix entrepreneur Paul Rollins would have preferred to borrow from a locally owned bank, but every one that could have handled his $2 million credit line has been bought out.

So Mr. Rollins, who sells mobile computers used in police cars, did what more and more small-business owners are doing: He hunted far and wide for the best deal. Ultimately he got his loan from a community bank in San Diego.

"I don't care where the bank is," Mr. Rollins said.

Attitudes like Mr. Rollins'-he is willing to do business by mail, phone, and fax-are crucial to the success of California banks that are blazing trails in remote lending.

More than in any other state, banks in California have staked much of their success on the premise that small-business lending will take on high- volume, low-margin characteristics. Banks elsewhere are going down the same path.

"California is the most competitive market, and if you can figure out how to do small-business loans here you can do it anywhere,"said Janet Garufis, BankAmerica Corp. senior vice president and business banking manager.

The state's largest banks, BankAmerica and Wells Fargo & Co., are using credit scoring coupled with direct mail and loan-by-phone systems to churn out thousands of small-business credit lines a month.

Meanwhile, a bevy of California community banks-among them Bank of Commerce, Imperial Bancorp, and Sierra West Bancorp - are expanding with Small Business Administration loan production offices in states where they have no deposits.

One of the earliest banks to drive the trend toward low-cost delivery methods, Wells Fargo floods the mailboxes of thousands of small-business owners nationwide with envelopes printed with "you're prequalified for up to $25,000."

Since Wells Fargo launched its direct mail program, the bank has jumped from 11th to second in lending to small business, according to Sheshunoff Information Services.

Wells Fargo's small business division, led by vice chairman Terri Dial, had 216,486 small-business loans outstanding, totaling more than $3.9 billion as of midyear 1996. The San Francisco bank has promised to lend $25 billion to small businesses in the next 10 years.

In comparison, the loan portfolio at the largest bank lender to small business, NationsBank Corp., which serves entrepreneurs through its branch network, has remained fairly flat for the last two years.

To receive Wells Fargo credit lines by mail, business owners list their bank account numbers, Social Security number, business taxpayer identification number, household income, and business revenue on a one-page form. No tax returns or financial statements are needed.

Dozens of other banks, including Richmond, Va.-based Signet Banking Corp., have begun mailing credit offers nationwide following Wells' example.

Gary Klein, Signet executive vice president, said direct mail is changing the way bank lenders and small-business owners view their relationships.

"We won't have a branch with a person sitting behind a desk in Irvine, Calif.," Mr. Klein said. "But small-business owners, particularly the younger ones, define a relationship much differently than they did 10 or 20 years ago. They are willing to have a relationship by phone."

BankAmerica is betting that entrepreneurs will borrow by phone, and indeed, a shrinking percentage of its small-business loans are made face- to-face. The San Francisco-based bank maintains toll-free telephone numbers in 10 western states for business owners to apply for loans up to $50,000.

By reducing customers' interaction with costly branch personnel and steering them toward telephones, banks can reduce the cost of making smaller loans and lower the interest rates and fees.

"This product has become commoditized," Ms. Garufis said. "It's only a matter of time before pricing becomes a competitive advantage."

For BankAmerica, small-business lending has already become a volume business. Last April, the bank promised to lend $10.6 billion to entrepreneurs within three years. It was more than halfway there, at $6.6 billion, after just 12 months.

"The competition is going to narrow and there are going to be fewer players making more and more loans," Ms. Garufis said.

In addition to loans by phone, BankAmerica makes SBA loans in 18 states, including seven where the bank has no retail presence. The bank doubled its SBA volume in 1996, to 1,117 loans totaling $413 million.

Smaller banks in California say they too can play the SBA game. The $292 million-asset Bank of Commerce, San Diego, which has six branches, has 12 SBA lending offices in six western states.

The $3.7 billion-asset Imperial, in Inglewood, has 16 such offices in five states.

Garry Barnes, Imperial senior vice president and manager of small- business lending, said customers are not concerned with a bank's location, but they want quick approvals and low fees.

"We are constantly trying to refine our delivery systems to meet customers' needs and reduce costs and pass the savings on to the customer," Mr. Barnes said.

Sierra West Bancorp of Truckee River, Calif., has three SBA lending offices outside its branch network and was among the first banks to securitize SBA loans.

The bank will complete a $50 million securitization of the unguaranteed portion of SBA 7(a) loans this month and plans to securitize others.

William McGaughey, Sierra West senior vice president and treasurer, said he expects banks will securitize traditional owner-occupied commercial real estate loans next.

"Securitization gives us the ability to keep our loan generation going full blast," Mr. McGaughey said. "It will help those of us that are specialty lenders compete with the nonbank lenders."

Traditional bankers should not feel overly threatened by the high- volume, nonbank-style approach to SBA lending, said David Bartram, Bank of Commerce executive vice president.

Bank of Commerce wants to capture the market for SBA loans in other states, but acknowledges that local bankers will still hold small-business deposits and issue some lines of credit, Mr. Bartram said.

"I don't think a small-business customer expects to go to one financial institution for all their needs," Mr. Bartram said. "That's not the way the banking industry works anymore."

Alan Lipsky, first senior vice president for commercial lending at Valley National Bank in New Jersey, said bankers in other areas will soon follow California's lead. Valley opened SBA lending offices this spring in Maryland and Delaware, states where it has no branches.

"The West Coast has always had bigger players in SBA lending," Mr. Lipsky said. "We are catching up."

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