United Companies Financial Corp., a major national subprime lender, is spending heavily on computer technology in the hope that it will enable the company to fatten profits by snaring better credits more consistently.
Its new software is designed to drive down costs and drive up profits by allowing United Companies to be as paperless as possible when underwriting and servicing home equity loans to borrowers with blemished credit records.
The technology, which is scheduled to be in place systemwide by yearend, would enable the company to quickly size up prospects conditionally so that undesirable prospects can be weeded out quickly and reasonable risks can be catered to immediately.
"We want to drive down the cost of production and drive up unit profitability," says J. Terrell Brown, chairman and chief executive of the Baton Rouge, La.-based company.
Last year, United Companies increased its expenditure for technology by almost 300% to $13.6 million. This year the outlay is being raised by another 12%, to $15.2 million.
"For a company our size, that's a pretty huge commitment," says Mr. Brown.
United Companies' strategy consists of automating much of both the front-end processing and the servicing of the accounts.
Assuming the information that prospective borrowers provide about themselves is accurate, originators would use the customized software to score them. The prospects would either be granted conditional approval or denied the credit, sometimes on the spot, but in no longer than a day.
Repayment plans would be shown to prospects, who typically seek home equity loans to consolidate debts, make home improvements, or make a significant purchase such as an automobile.
What is now paperwork would be transmitted electronically to headquarters in Baton Rouge instead of being sent by overnight mail, an expensive procedure.
Final approval, of course, would come only after United Companies checks with third parties, such as credit bureaus, on the prospects' credit and employment backgrounds. And appraisers would check the collateral-the potential borrowers' homes. This procedure could require up to two weeks.
However, during this period, good prospects would more than likely stop shopping for loans because they would be comforted by knowing that if they have submitted accurate information, the loan will be approved. This means desirable United Companies borrowers would patiently sit tight while waiting for the final word.
"You've taken the customers off the street," said John D. Dienes, president and chief operating officer.
He added that the technology would allow for up to 3,500 conditional approvals per month, compared with up to 1,500 now.
Another aspect of United Companies' new technology is designed to service accounts better.
"By and large, customers have nicks in their credit histories and so we have to stay on top of the loans," said Mr. Dienes. This aspect includes a predictive dimension that forecasts the level of jeopardy customers' changed circumstances, such as taking on too much additional debt.
That system is to be set up so that borrowers would automatically receive telephone calls from the United Companies collections department reminding them that payments are due.
Some customers with spotty records might come home from work to find on their answering machines automated messages urging them "to save a late charge," said Mr. Brown. Calls answered by a person would be switched to a collector, who would politely make the same suggestion.
Customers with bad records would be called early and spoken to by collectors, Mr. Brown added. He also said collectors would use their time efficiently because the most seasoned among them would be assigned to the worst credits, while junior personnel would handle easier cases.
The department would be staffed by 80 collectors instead of the 300 to 400 who would be needed if the entire operation were manual.
While no one can argue with the technology's value to United Companies, some critics question why the company waited so long to begin installing the system. "In taking on technology, it's pretty common that everyone's been overpromised and underdelivered," explained Mr. Brown. "The technology we're using was not here two years ago."
In addition, Mr. Brown said he needed to bring aboard someone highly qualified to lead the company's technology thrust. He said he did that two and a half years ago, when he hired John C. Pisa as a senior vice president for technology. Mr. Pisa, who has a doctorate in operations research and development from Stanford University, had been a senior vice president of management information systems at Louisiana National Premier Bank.
Other observers wonder whether the technology is designed to help the company attract a suitor, something that United Companies executives deny. "We are not dressing ourselves up for a wedding," Mr. Dienes said.
Still other critics say that the caliber of many of the company's existing loans is poor. "Asset quality will probably continue to be a drag on earnings," said Reilly Tierney, a securities analyst with Fox-Pitt Kelton.
"Asset quality is stable and (foreclosures and delinquencies are) trending down," Mr. Brown responded. "They're down 33 basis points in the first quarter" to 10.30%.
Mr. Dienes added, "We'd like to drive that down toward 10% by the end of the year."
To be sure, United Companies' first-quarter net income of 19 cents a share was off considerably from the 62 cents the company earned in the year-earlier period.
Dale E. Redman, executive vice president and chief financial officer, attributed much of the decline to the company's capital expenditures, primarily for the new technology. "We are spending a lot of time, effort, and money on building our infrastructure and we have to expense that," he said.
Moreover, under the company's gain-on-sale accounting practice, the profit during the quarter was 7.67% percent, down from 7.88% in 1997's first quarter.
In fact, the company says that it anticipates its gain on sale of loans will be between 6% and 7% for the entire year, compared with 9.1% last year. Therefore, the company is forecasting earnings per share in 1998 to range between $1.25 and $1.75, a decline from last year's $2.30.
Mr. Brown also forecasts loan generation of about $3.6 billion this year, a 16% increase over last year's performance. In 1999, the company expects 20% growth to more than $4 billion.
Mr. Brown believes Wall Street's suspicions of subprime lenders should be changing because of the recently announced acquisitions of The Money Store Inc. by First Union Corp. and Green Tree Financial Corp. by Conseco Inc., a life and health insurer and provider of retirement annuities.
"The Money Store and Green Tree acquisitions validate gain-on-sale accounting," said Mr. Brown. "There are smart, sophisticated players out there that realize the value of high-yield asset generators."
