Wells Fargo & Co.'s Terri Dial has a secret for bankers who are relying on traditional relationships to sell small-business loans: You're doing it all wrong.

"Most people now are using face-to-face bankers for $30,000 loans, but they are kidding themselves if they think they can make a profit that way," said Ms. Dial, a Wells Fargo vice chairman and head of the bank's small- business lending program.

Acting on that view, Ms. Dial has helped Wells Fargo pioneer what is regarded as the first nationwide effort to offer loans to small businesses nationwide through the mail.

Since it launched its direct mail program across the country last year, Wells Fargo has jumped from 11th place to become the second-largest small- business bank lender, with $3.5 billion in outstanding loans.

Whereas NationsBank Corp., the No. 1 bank, has relied on its extensive branch system in a high-growth region, progressive Wells Fargo has largely bypassed costly relationship officers with a program built around mailing out simple loan applications to pre-approved prospective customers.

In doing so, the bank is rewriting the rules for how small-business lending is being done.

To be sure, other large bank competitors still aren't certain they want to play by these new rules, arguing they aren't comfortable enough with credit scoring or are too wary of tracking markets where they do not have a physical presence.

But Wells Fargo's proprietary credit-scoring system has information dating back to 1989, which means the data includes the impact of the 1991 recession on loans in California.

"As long as Wells keeps that focus, there's no question they will quickly become the leading lender," said Charles B. Wendel, president of Financial Institutions Consulting.

When Wells Fargo began its push into small-business banking in 1989, the San Francisco-based bank had less than 1% of the small-business loans in its home state, according to Ms. Dial. Now the bank has 20%.

Wells Fargo's business banking group has cranked out small-business loans at a blistering pace since it began a pilot program for direct mail loans in 1992.

What's more, the bank has promised to lend $25 billion to small businesses in the next 10 years. Given that Wells Fargo's average loan size is between $25,000 and $30,000, that's about 900,000 loans.

To accomplish the goal, the bank will have to make about 388 loans every business day. By contrast, the Money Store Inc., another national specialized, low-cost lender, issued seven Small Business Administration loans each business day during its 1996 fiscal year.

But observers argue that the goal is plausible, given the bank's past record and strategic approach.

Wells Fargo's thinking is relatively simple: With the larger end of the commercial market crowded with other large banks, small business was one of the few untrod avenues to loan revenue growth. Ms. Dial's mission was to come up with a way that a big bank could sell - and sell big - to a market traditionally served by community banks.

"Before 1989, Wells Fargo had a small-business lending policy that could be summarized with one word, 'No,'" said Lucy Reid, executive vice president of its business banking group. "We realized we needed to be more responsive."

Wells Fargo started in 1992 with pre-approved lines of credit up to $25,000 in California. In 1995, it expanded the program nationwide and now offers loans from $5,000 to $100,000 by mail in rural and urban areas in all 50 states.

"They are going after a massive number of businesses," said Linda Winston, senior vice president of Frost National Bank in San Antonio.

In the last year, a handful of other banks have introduced direct mail promotions for business credit lines, but most have stayed within their geographic region.

While Wells Fargo is a full-service bank in California and nine other western states, small-business loans are the only product it offers nationwide.

"We took it nationwide and held our breath," Ms. Reid said at a conference in Washington this fall. "Thankfully, it is performing well."

Judging by Wells Fargo's loan growth, there is a large sector of the small-business market that likes getting loans in the mail.

The one-page mail-in application is more convenient than other bank's applications, said Wells Fargo customer Carla Stellweg, owner of a New York art gallery. Ms. Stellweg applied to New York banks but was turned off by their documentation requirements.

"At all the other banks, the requirements to give me a small-business loan were totally unrealistic," she said. "Theirs was so much easier."

Wells Fargo's application asks for the small-business owners' annual household income and the business' annual sales. Wells Fargo will not disclose what information is used in its credit-scoring system.

But along with new thinking on distribution and technology goes a laser- like focus on costs.

Throughout Wells Fargo's empire, each time a teller accepts a deposit from an entrepreneur, Ms. Dial gets the bill for the transaction. And for every telephone call a small-business owner makes, any service that costs the bank money, Ms. Dial also gets the bill, no matter how small.

"I pay for everything," Ms. Dial said .

Even in laid-back California, Ms. Dial's staff is so cost conscious that colleagues fine one another for arriving late for meetings, using foul language, or interrupting.

Last month, the money collected was used to buy a holiday basket for a needy family. Ms. Dial said the fines encouraged the staff to reduce time spent chitchatting before meeting from 15 minutes to five.

Wells Fargo compensates for the expense of smaller loans and the risks involved in others with interest rates that range from prime plus .75% to prime plus 8.75%.

"On $5,000, I can't imagine making a profit, but in time you hope that $5,000 will grow into something larger," Ms. Dial said.

She isn't willing to discuss credit problems in the small- business loan portfolio, but said they were within the range of what the bank had projected.

"It's highly unlikely that Wells will blow themselves up doing this," said Mr. Wendel. "The loans are small, so the downside is low."

Wells Fargo reviews its credit-scoring procedures and lending standards daily, Ms. Dial said. The bank tracks its customers' use of credit by the first three digits of their ZIP code or by industry codes.

"Every day the behavior of every account is going into the data base," Ms. Dial said.

The bank's use of technology has come a long way since Ms. Dial, a political science major from Northwestern University, started her career as a teller in a Wells Fargo branch in San Francisco's Mission District in 1973.

Back then, she tallied interest payments using tabulators rather than calculators and recorded payments by hand on slips of paper that were sent to a central office at the end of each week.

More than 25 years later, Ms. Dial says one of her favorite weekend pastimes is surfing the Internet for five hours in a sitting. Ms. Dial, however, says she doesn't want to use cyberspace to offer credit lines because the computer network does not allow the bank to tailor promotions to specific market segments.

While she hasn't traded her silk scarves for a pocket protector, she says, "I don't think anyone can be in business today and not have a little bit of a computer geek in them."

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