The benefits of handling loans electronically rather than passing around sheaves of paper are a given.
An all-digital process is quicker, with fewer errors and less paper to be filed in a cabinet. Less bureaucracy and faster answers make for happier customers. U.S. Bancorp, for one, has found all these advantages in its six years of offering paperless consumer loans and recently rolled out a similarly automated account opening.
Yet a large segment of the industry still hesitates to use this technology, for legal, technical and cultural reasons, some more perceived than real.
"Banks continue to stumble when it comes to automating the consumer lending processes," wrote consultants at Cornerstone Advisors in a recent study of 61 U.S. banks with assets of $1 billion to $40 billion nationwide. "The percentage of direct loans approved through automated underwriting and direct loan applications originated online remains at zero. Banks are simply not spending the time or money on direct consumer lending to make it an efficient process."
In a survey of 80 community banks and credit unions around the country, AccuSystems, a document imaging and management software company in Pueblo, Colo., similarly found that just 12% are making paperless loans.
The reliance on manual, paper-bound lending continues at a time when costs are rising. Most bankers are scrambling to find ways to become more efficient without sacrificing customer convenience a combination of needs that automated loans and account openings would seem to neatly answer.
U.S. Bancorp, based in Minneapolis, has been offering e-signature-assisted paperless consumer loans in all 3,000 of its branches since September 2011. In the $387 billion-asset bank's process, the customer is authenticated by standard means, then signs his name using an electronic signature pad. Bank customers electronically sign documents 70,000 times per week in the branches (the bank calls these "in-branch signing ceremonies") which translates to more than 150,000 signed documents a week. Most small consumer loans are handled this way, including home equity loans and lines of credit. (Mortgages are not paperless yet, due to incompatibilities with the bank's existing origination systems, but they are on the bank's road map.)
About a year ago, the country's ninth-largest banking company also began offering paperless deposit account opening.
"We started at 70% of all loan account openings having e-signatures, and within a year we were up to 85%, which is where we stayed for the five years after that," said Ron Eddy, an associate vice president for technology and operations at U.S. Bank. "For deposits we're at 90%."
The sliver of loans and new account openings that the bank does not handle paperlessly are mostly cases where electronic signatures are still not quite accepted. For instance, certain accounts involving the Small Business Administration can't be e-signed under the bank's interpretation of the laws and forms involved. And a few bank customers choose to not use the electronic signature pad; the bank lets them opt out.
One of the biggest advantages to the automated process is the reduction in errors, due to the fact that bank staff no longer need to type in data from paper documents the data is captured through imaging of paper documents or automatically drawn account data.
"The customer now has the flexibility to go into any branch, sign wherever they need to, and it's reduced a lot of errors in the paperwork," Eddy said.
In fact, mistakes have dropped so much that entire departments that used to be dedicated to fixing errors and calling those customers back in to repair mistakes have been disbanded and the reps are being redeployed to other work, he said.
THE HURDLES TO PAPERLESS LOANS
There are a few reasons banks haven't rapidly adopted the technology U.S. Bank has found so helpful.
For banks that specialized in higher-end customers with more complicated transactions, investment in the technology would not have that same payoff.
"Mid-market banks are not [offering paperless loans] as much as you'd see U.S. Bank or other retail banks [doing], because this group is primarily commercial business and wealth management banks," said Sam Kilmer, a senior director at Cornerstone Advisors. "For the small to midsize banks, it has not been a priority."
His colleague, Cornerstone principal Terence Roche, adds that "you invest where you make your money. For a lot of mid-size banks, retail is not their primary line of business, and if you have certain number of dollars to invest, commercial or cash management or trust would be higher on the food chain than retail."
Some banks worry about the legal and compliance aspects of using electronic signatures and documents.
According to Eddy, no problems have materialized on this front for U.S. Bank. "We haven't had a single court challenge in the six years this has been out there," he said.
Still, the use of e-signatures does get questioned often in court, said Michael Laurie, the vice president of product strategy and co-founder of e-signature software company Silanis, whose e-sign software U.S. Bank uses.
"There's tons of court cases out there," he said. "They challenge the use of e-signatures. They challenge the use of e-documents and records."
Usually the complainant is trying to fight something else (for instance, they want to break the underlying contractual obligation) and the e-signature is a red herring, Laurie said.
"Challenging the use of an electronic signature or e-record seems like an easy way to go, but it's actually much harder because there's so much electronic evidence that's generated with electronic transactions, not just signatures but documents, emails, and logins to the website," Laurie said. "There's a huge digital footprint being created when people do business online. It becomes tough to repudiate that digital footprint."
Every case Laurie has seen challenging the legality of e-signatures has failed, he said. "The courts have upheld all the statutes around electronic signatures," he said.
New rules have enabled electronic signatures to be accepted in some cases where in the past they have not been, noted John Levy, board member of the Electronic Signature and Records Association and executive vice president of the Linden, N.J. systems integrator IMM. For instance, in January 2013, the IRS for the first time allowed requests for taxpayer transcripts to be signed electronically.
At the end of this year, the Federal Housing Administration is expected to allow additional documents in the mortgage process to be signed electronically.
"That's going to make a big difference," Levy said.
Other government agencies (which Levy calls "resting places" for many documents) still resist e-signatures, he said. His trade group "has to continue to educate some government agencies that might not currently accept electronic records and signatures, to show them what it would mean for them and their customers and for financial institutions," he said. The organization is working with state motor vehicle departments to urge them to lighten their rules.
Another hurdle to paperless loan adoption is systems integration, partly because many banks have older core banking systems and loan origination software that don't play nicely with newer electronic signature, imaging and workflow software.
U.S. Bank built an integration layer between the Silanis electronic signature software and the Argo Data Resources software it uses to complete the account opening process. (The Argo software captures the customer's information, directs where that data goes in systems throughout the bank and handles the business rules around account opening.)
The integration took about 10,000 hours, about 25% of the total development time for the account opening automation project.
"That time could have been better utilized on bank-specific solutions," Eddy said. Silanis and Argo recently rolled out an integrated product that weaves their two technologies together.
Mortgages, particularly loan closings, present an added layer of difficulty. "There's issues with transferring notes to investors like Freddie Mac and Fannie Mae, also getting stuff recorded with the county recorder," Laurie said. "Most banks are looking closely at doing the application portion of the mortgage upfront [paperlessly], and being able to deliver disclosures electronically."
Integration issues often get in the way here, too. U.S. Bank's mortgage software is proprietary and not flexible enough to accommodate e-signatures, Eddy said.
BRINGING CHANGE TO THE BRANCH
The paperless loan process is helping U.S. Bank retool its branches and free up staff to focus less on transactions and more on sales and advice.
That goal "is nothing specific with U.S. Bank -- all banks are thinking this way," Eddy noted.
"We want to increase the flexibility offered to our customers to handle their own processes," he said. "If signatures are needed, they should be able to go to any of our various channels to have that happen. In the branch, it's about advising them on decision making going forward with their accounts."
Instead of branch staff being bogged down by the physical process and regulatory requirements of opening accounts, the software takes care of that, freeing the banker to give advice.
"We want to put that power back in the banker, where the banker is able to form a relationship," Eddy said. "We take away those more detail-oriented parts of it, so they can focus on the products we offer and advising the customer. The customer gets the benefit of being able to do business their way, on their own device or in a branch from wherever they want."