Taking advantage of regulations that will drastically change the way lenders secure collateral, a small Washington State bank has created a database that it says will help it shorten the lien-recording process from several weeks to a few minutes.
City Bank in Lynnwood is betting that lenders angling to be first in line for repayment if borrowers go bankrupt will use its online service in record numbers once new Uniform Commercial Code rules take effect this summer. We saw an opportunity to become a leader in a national market, said Conrad Hanson, president of $542 million-asset City Bank. With the Internet craze, we saw potential in e-commerce.
By July 1 all 50 states are expected to ratify a raft of amendments to Article 9 of the Uniform Commercial Code, which governs how collateral is secured.
The most important changes streamline the process by introducing one-stop filing that will let lenders record all liens against a borrower in the borrowers home state. As it is now, if a manufacturer uses assets in multiple states as collateral, the lender must file collateral agreements in each of those states.
More important to City Bank, which provides its document services through its Diligenz LLC subsidiary, is the lifting of a ban on electronic filing.
Bryan Dawson, the chief executive officer of Diligenz, said his company will be able to fulfill its customers document-search and filing needs entirely online, something none of its competitors can do. For about $40, Diligenz can conduct a search and provide copies of any documents it unearths, file a lien, and track it to make sure it is entered into record.
Though banks are among the biggest producers of liens, City Bank appears to be the only one in the business of recording them. Banks and other lenders typically outsource lien filing.
City is the undisputed leader in this field, said Jim Bradshaw, a research analyst at D.A. Davidson & Co. in Portland, Ore. Theyve taken a process that was slow and time-consuming and made it quicker and more cost-effective.
Amy Mitchem, a senior loan closer for Business Loan Express in Washington, D.C., said her company, a Small Business Administration lender, uses Diligenz for 400 to 500 searches a month.
Im always calling them and saying, Hurry, hurry, hurry, she said. Our niche is closing loans quickly, so we need them to give us our searches quickly, and they do it. Most of the time, they pull the information up on the computer while Im on the phone with them.
The first year after the revised Article 9 takes effect could be especially fruitful for Diligenz. One amendment requires borrowers to re-record liens that contain errors within one year. Mr. Dawson said he expects filing volume to top 50 million between July 1 of this year and July 1, 2002. There are 12 million to 15 million filings in a normal year, he said.
Mr. Hanson said revenues at Diligenz are already rising they went from $275,000 in December to $300,000 in January and about $400,000 in March. He expects Diligenz to gross $5 million to $6 million of fee income in 2001 and as much as $10 million next year. Those sales translate into more noninterest income.
Diligenz growth and plummeting interest rates which have boosted demand for new mortgages and refinancings will pace what Mr. Hanson projects will be a doubling in City Banks 2001 noninterest income, to $28.8 million.
City Bank bought Mr. Dawsons company in fall 1998. It invested more than $10 million to build Diligenz database and expand its 10-person work force to 75, Mr. Hanson said.
Despite that expense, City Bank posted net earnings of $18.3 million and an average return on assets of 3.49% in 2000. That goes a long way toward explaining Mr. Hansons decision to forgo seeking new business lines and stick to our knitting, which is commercial banking.