Cutting cost per loan through electronic content management.

Times are tight. Origination volumes are down. Defaults and foreclosures continue to soar, and lenders are finding it harder and harder to stay afloat. However, there is hope in sight. As history has shown, the housing market is extremely cyclical. To survive the downturns, lenders must learn to do more with less without sacrificing customer service.

According to Needham, Massachusetts-based TowerGroup, the top 10 lenders in 2006 averaged $86 million in document management costs, or $202 per loan. In a 2008 report, Top Business Drivers, Strategic Responses and Technology Initiatives in Consumer Lending, TowerGroup analysts cited data management and enterprise content management (ECM) as key technology initiatives lenders should undertake as part of a larger strategic response to top business drivers, including market volatility, cost containment and paper/manual-based processes.

According to the report, "Lenders of all varieties feel continuing pressure to operate their processes more efficiently and squeeze every possible day from the cycle time and every possible dollar from operating costs. Time and cost are driven by a number of factors. The remaining opportunities for consumer lending organizations to become completely paperless and automated provide ample motivation for lenders to act. ... Enterprise content management tools are essential to move processes to the next plateau of efficiency."

Managing content to promote efficiency will be more important than ever as mergers and acquisitions continue to pervade the industry. To maximize the benefits while minimizing the investment, lenders must tackle implementation strategically. By taking a phased approach and tightly integrating with existing line-of-business applications, lenders will be able to better manage their content and data from origination through investor delivery, while decreasing their cost per loan and enhancing overall productivity.

When automating the mortgage process, the most logical implementation progression moves from the beginning of the process to the end. Most lenders start with a loan origination system and progress through the origination cycle, adding automated underwriting and fraud-detection systems, with the end goal of, eventually, adding eSignatures, eClosings, eFilings and eStorage.

When implementing an ECM system, however, the process of moving to automation tends to work best when starting at the "end" of the process--in the file room. By starting with files that are, for the most part, relatively inactive, lenders can take the first step in going paperless by eliminating the largest store of documents within the institution. It also allows them the time and flexibility to establish important components of their ECM system without disrupting day-to-day business activities.

Though the industry touts the benefits of going paperless to advance the eMortgage, much of the front end of the origination process now heavily relies on paper. Once lenders get their file rooms electronic and under control, the next phase of ECM implementation should focus on eliminating paper at the beginning of the process and creating tight integrations with existing line-of-business systems.

All of this is possible because current ECM systems can ingest documents in a range of file formats--extensible markup language (XML), SMART[TM] Docs, Microsoft[R] Word[R] and Excel[R]--from a range of channels, such as e-mail, fax and hard copy. Because of this capability, lenders can experience the operational and cost benefits of ECM by eliminating paper from the entire process. This includes all documents associated with a loan file, as well as individual documents relating to day-to-day activities and not a particular loan.

Organizations' reliance on e-mail makes it quite simple to input most communications into an ECM system, but lenders must also create procedures for scanning and indexing individual documents as soon as they arrive.

The good news, according to TowerGroup, is that converting front-end documents from paper to an electronic format will provide significant efficiencies throughout the origination process. In its November 2007 report, Imaging or Enterprise Content Management? How Mortgage Loan Origination Systems Go Paperless, TowerGroup states, "In contrast to scanning complete files, indexing these individual documents is simple because the person doing the indexing is usually well-acquainted with the documents and has a vested interest in making sure documents are marked appropriately. If these individuals' expertise and interest can be leveraged, the lender will have a document repository that has its documents classified more granularly than if the full package is scanned after closing."

Once documents are converted to an electronic format, lenders must establish a method for organizing the documents within the database. Creating an indexing system according to keywords that relate to users' day-to-day business activities makes document search and retrieval as easy as possible.

Given the amount of paper and varied types of documents contained within an average residential loan file, it is imperative that lenders establish multiple keywords to make search and retrieval as quick and painless as possible, and to ensure that one wrong stroke of a key doesn't lose a document forever. In its November 2007 report, TowerGroup asserts that lenders that fail to index effectively have set themselves up for frustration down the road. The report states, "Without taking the time to index documents at a fairly granular level, users are left to page through hundreds of images of a single loan file to find the one page they are looking for,"

Adding a bar-coding system complements keywords and completes an indexing strategy. If keywords are used alone, employees are forced to manually index documents according to established keywords, which negates the efficiency gained by ECM. By placing bar codes at the top of each document, the ECM system is able to interpret the code for this particular document and automatically index it according to the pre-established indexing strategy.

After indexing and scanning inactive loan files, lenders can turn their attention to scanning newly completed loan packages. Once the lender has received the executed documents from the closing agent, the completed file should be immediately bar-coded according to document type and scanned into the system for indexing and archiving. But until the lender's entire operation is paperless, this portion of the process could become the most time-consuming, as it requires significant amounts of manual labor to sort and prepare documents to be scanned into the system and verify that the documents were scanned appropriately.

Once the system is up and running across the institution, this process should run quite smoothly with very little human intervention. In addition, by scanning all closed files immediately upon receipt, lenders can speed the sale of loans to the secondary market and improve customer service because all documents and files are available to be distributed electronically in real-time.

Many lenders have already imaged closed loans and benefited as a result. However, most of their imaging systems are ill-equipped to provide the enterprisewide benefits of an ECM system. Therefore, it is imperative for lenders to create a seamless integration among their back-end imaging system, their ECM system and their front-line systems. Otherwise, lenders run the risk of creating unnecessary automation "stop-gaps" because their disparate systems are not running as a cohesive unit.

For there to be an efficient electronic loan processing environment, all systems must work together without error so that handling paper to process the loan becomes the rare exception and not the rule. For example, an ideal integration between a loan origination system (LOS) and an ECM system should allow users to access individual documents stored in the ECM system through the LOS interface. This is where the indexing strategy becomes extremely important. If the integration and indexing strategy are set up correctly, the LOS should be able to make documents contained in the ECM repository available within their related LOS interface screens based on the metadata and keywords associated with the documents.

The same holds true for integration with other line-of-business systems. Advances in optical character recognition (OCR) make it relatively easy to extract data from electronic documents to complete forms within mortgage line-of-business systems. Consequently, users now have the ability to work in a completely paperless, electronic environment. Such an environment allows for faster loan processing and, ultimately, sale on the secondary market.

For lenders with service-oriented architecture (SOA) versions of their line-of-business systems, integration with ancillary systems like an ECM system becomes that much easier. This approach gives the lender the best chance to access the technology that will eventually enable lights-out processing. Additionally, it may allow for the creation of a true enterprise solution for lenders that are part of an integrated financial services institution with other lines of business using content management.

Despite all of the operation and cost-efficiency benefits of an ECM implementation, many lenders feel the current state of the mortgage industry makes it difficult to justify significant information technology (IT) investments, even for the sake of cost reduction. Luckily, software as a service (SaaS) has evolved sufficiently to provide lenders with a cost-effective alternative to traditional hard software installations--and its popularity is growing.

SaaS platforms are predicted to make up 23 percent of the U.S. software market by 2010, according to an August 2007 report by RBC Capital Markets, New York. By leveraging this model, lenders can provide their company with needed capabilities--at the same level of quality as an internally hosted, on-premise software system--for a fraction of the cost. In addition, lenders can avoid making significant upgrades to servers and other hardware/network equipment that would be required to effectively maintain an internal, enterprisewide software installation.

However, as is the case with most new technology, there are some concerns about SaaS--particularly with the security of such a model. To quell security fears and ensure proper data protection, lenders should seek SaaS platforms that take a multi-faceted, well-rounded approach to security that includes high-security firewalls, intrusion-detection systems, and encrypted passwords and data.

It's also a good idea to be certain that your data are in a center that has redundancies in place. Redundancies help to ensure the safety of your data in the event of a natural or manmade disaster. To satisfy regulatory requirements, a SaaS vendor's data center should be SAS 70-certified.

Regardless of the platform, lenders must continue to find ways to cut their cost per loan to remain competitive in the narrowing mortgage landscape, Through electronic content management, lenders can extract profit out of document processing in the midst of the credit crunch while pursuing a hybrid approach to eMort gage at the pace of the industry. By leveraging the imaging, workflow and storage capabilities of an ECM system, lenders can create synergy among the data, systems and paper required in the lending process.

Additionally, the "straight-through processing" environment created by an ECM system through integration with existing line-of-business systems significantly reduces labor and materials costs per loan. This allows lenders to speed the origination process and provide competitive pricing and enhanced service--necessities for any lender attempting to maneuver through the peaks and valleys of the current market on to the next cycle of prosperity in residential lending.

Jason King is director of financial services and insurance for Hyland Software Inc. in Westlake. Ohio. He can be reached at jason/[e-mail].