The recent establishment of a standard for digital contracts for auto loans could lay the groundwork for broader use of digital documentation in other types of credit, lenders and observers say.
Bankers say they could save “tens of millions of dollars a year” from processing car loans electronically, according to Mark A. Zalewski, the director of e-standards at the American Financial Services Association.
The Washington trade group would like to monitor the car-loan effort for a year or so before tackling another industry segments, Mr. Zalewski said. He expects similar standards to eventually be used for several other areas, including business equipment, credit card, student, and even mortgage loans.
“We think it’s going to revolutionize the way the business is today and how it will evolve in the future,” he said. “We think it’s the foundation for all kinds of contracts.”
The car-loan standard — X9.103-2004, “Motor Vehicle Retail Sale and Lease Contracting” — was in development for a year and a half before the American National Standards Institute formally adopted it in July.
Mr. Zalewski said implementing the standard could allow automakers’ captive finance arms to save $11 million to $18 million a year, by eliminating the processing and storage of paper documents, as well as the costs arising from processing errors and omissions.
“Companies want to go in this direction because of the huge amounts of money they can save,” he said.
J.P. Morgan Chase & Co. began to offer indirect online lending through auto dealers in 2002. Judy Miller, a spokeswoman for the New York company, said it is currently working with 2,000 dealers across the nation.
By replacing a “cumbersome, paper-based contracting process” with an electronic one, JPMorgan Chase enabled dealers to receive payment for loans on the same day that they originate the agreements with consumers, rather than waiting days or weeks to get the money, Ms. Miller said. “Same-day funding is very beneficial.”
And bankers say they are hopeful the same advantages and savings can be applied to other parts of their businesses.
“I’m hopeful that our industry, financial services, will step up to the plate and take advantage of the opportunity,” said James A. Gross, a vice president at Wells Fargo & Co. and the e-business leader in the San Francisco company’s international group.
The standard allows consumers to “sign” lending forms electronically, typically by using an electronic stylus and a touch-sensitive pad, though the rules do not define any specific technology for capturing the signature. It also addresses the dealer’s ability to sell the loan — and transfer the documents — to a bank or other finance company.
All these issues have already been resolved for contracts executed on paper. The standard was developed to assure market participants that electronic contracts will enjoy the same protection under the Uniform Commercial Code.
Mr. Zalewski said automotive contracts were a good testing ground for the new technology. “We kept the focus narrow, so we could move quickly into the marketplace.”
Perhaps more importantly, he said the market is big enough to demonstrate whether the economies of electronic lending can produce a payoff. Last year 16.7 million new vehicles were sold or leased, at an average price of $24,000.
George E. Halloran, the vice president of global strategic planning at Ford Motor Credit Co., the finance arm of the nation’s second-largest automaker, said the new standard could help dealers sell cars more efficiently and get their money sooner after selling the loans to indirect, third-party lenders.
Ford Credit relies today on a manual process to review the loan data, he said, including the interest rate, the loan program, and all the information on the applicant. “We have to mechanize all those things. The matching system is two eyeballs right now.”
Still, these changes will not happen overnight, Mr. Halloran said. Ford still must train its dealers in the new procedures and install the proper equipment. It must also transform its paper credit applications into online documents.
He estimates that it will take 18 month for Ford to roll out the program. “There are a lot of infrastructure pieces that need to be fully connected.”
But once the systems are in place, Mr. Halloran, a member of the AFSA board, foresees broader uses for e-contracting. “Credit cards could follow the same general framework. So could mortgages, although mortgages are more complex.”
And though bankers are beginning to introduce e-contracting, they also remain cautious about how the service is rolled out.
Mr. Gross said not to expect an immediate profusion of e-contracting in other lending operations. “Some of these implementations are pretty siloed, which makes it difficult to reuse in other industry sectors.”
The value of the auto contracting standard lies “in terms of demonstrating, from a value perspective, what can be done” with electronic lending forms, he said.
There is still a “generalized skepticism” about the reliability of such technology, especially the risk that a borrower will try to repudiate the obligation, Mr. Gross said. “That perception is a very difficult one to change.”
