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Technology on a budget.

Tracking and servicing mortgage loans has become increasingly a technology-driven business. One of the many areas within servicing that is driving the need for technological solutions is the processing of hazard insurance documents. While many institutions may still process hazard insurance information manually, they are becoming the exception, not the rule. The majority are clearly recognizing the essential value, efficiency and competitive advantage of technology-based process improvements.

Yet even those institutions actively incorporating technology into their in-house insurance servicing operations are finding it increasingly difficult to cope with rapid technological advances, as well as the need to continue cutting expenses. Many find they can no longer justify the tremendous costs involved in upgrading the hardware, software, programming and staff required to support new systems. For them, a third-party provider becomes the most cost-effective and efficient means of taking advantage of advanced technology. Each institution, however, has its own unique requirements.

The trend toward outsourcing in the mortgage servicing business is being driven by several factors. They include:

Less fear of relying on outside service providers. Outsourcing has become more commonplace in the mortgage industry. The experience has made lenders more comfortable with using outside servicers in subservicing arrangements or in outsourcing certain aspects of the servicing operation. Outsourcing also has gained a following on the origination side of mortgage banking, where it has worked well for mortgage lenders seeking to put their costs on a more variable basis to match the ebbs and flows of production revenue.

The need to accurately predict future operating costs.

Whether full or partial outsourcing is used within an operational area, the mortgage banker clearly knows how much the cost of that servicing will be each year over the term of the subservicing contract.

Outside servicers offer economies of scale and technological investment that most mortgage bankers would find difficult to cost-effectively duplicate. For a mortgage banker to try and match in-house the service and systems of a typical outsourcer, he or she would require an open-ended, massive investment in personnel, systems, technology and maintenance. Furthermore, it would require regular additional expenditures to stay current with new technologies and maintain efficiency. Outsourcing typically offers state-of-the-art technology and specialized expertise at no additional cost. It also relieves the problems of contending with the rapid evolution and inevitable obsolescence of computer technology.

Market forces demand that,mortgage bankers reduce their costs and focus resources on those areas of the business that offer the greatest return for dollars invested. Decreasing production volume has shrunk revenues and increased unit costs in mortgage lending, leading to downsizing within many mortgage lending operations. Outsourcing is a logical response to this market force, since it is a dramatic way to cut expenses and free up resources that can be more strategically utilized.

While some mortgage banking institutions still prefer to maintain complete control of all operations, a growing trend is for institutions to entrust a third-party provider with partial or full outsourcing responsibility. In the case of hazard insurance servicing, this can encompass loan tracking and information processing as well as customer service.

American Savings Bank

In 1990, for example, American Savings Bank (ASB), headquartered in Stockton, California, realized it had to cut operations costs while improving the servicing on its approximately 180,000 mortgage loans. At that time, ASB was operating two loan servicing centers - one in Fullerton, California, and another in Stockton, California - and was using a service bureau in Fresno. ASB decided to consolidate its operations at a single servicing center in Stockton.

"After the consolidation of resources, we were still looking for efficiencies," said Katrina Cherry, assistant vice president of escrow services at ASB.

As a result, ASB hired a group of efficiency consultants to review operations. That group recommended outsourcing as one way to reduce operating costs and eliminate certain frustrations associated with processing information, and as a way to retain solid customer support services. But ASB didn't want to undertake full outsourcing of its servicing function.

"What we wanted was partial outsourcing," Cherry noted. "We wanted all insurance documents and force-order insurance handled by a provider, but. wanted absolute, real-time control of our customer service and support operations. To achieve that, ASB had to seek an outsource provider that could handle all the mail, process documents and get the information back to our service center within 24 hours or less. Additionally, we wanted on-line access to the outsourced data base."

What ASB discovered was that in most cases outsourcing was an all-or-nothing proposition, because' most providers did not have the advanced technology in place to rapidly process and integrate various documents into a single data base, nor could they provide the rapid turnaround required to support customer service.

At the time ASB was looking for a provider, American Sterling Corporation (ASC), an Irvine, California-based provider of outsourced processing services to the mortgage industry, had just automated its own document processing operations with an imaging system that seamlessly tied into its IBM mainframe-based expert system. ASC could provide rapid turnaround of information via electronic two-way communications, as well as the technology to allow ASB personnel to toggle on the same terminal from their system to ASC's, and vice-versa.

"It really makes a difference in our operation," said Cherry. "Four years ago, even though we were computerized, we were entering most information into the system manually, handling lots of paper, and it took 40 people a lot of time to do the work. Today, there is no manual processing and only seven people. All of our customer calls are handled through customer service and are rarely transferred for problem resolution. And to us, customer service is critical; we want control of complaints, problems and customer requirements. We want our customers to know that we appreciate their business and that we are here to assist them."

Outsourcing all insurance processing

At Coast Federal Bank in Granada Hills, California, all hazard insurance is outsourced, including the customer service activities. According to Sylvia Eldridge, customer service manager at Coast, the decision to outsource in 1989 was made primarily to off-load the insurance document processing activities.

"We handle more than 60,000 residential mortgages, and my responsibilities to our customers include cashiering, payoffs, modifications, loan inquiries, insurance administration and systems administration, "Eldridge said. "Before we started outsourcing the insurance part of the business, we had an insurance department of 20 people that basically was touching every piece of paper that came in because we didn't have document imaging in our system, plus we had to basically file all that paper. Now our insurance department is down to four people, one of which works exclusively with our outsource provider."

Coast has now outsourced all of its insurance processing activity, including customer service. "It makes more sense to us," said Eldridge. "Customer service on insurance information often requires lots of time on the telephone, especially if you're discussing with a customer that their insurance isn't current and force-order insurance has been placed. All that telephone time costs money, as well."

Because of the integration of imaged document data with more traditional alphanumeric data, customer service representatives at American Sterling have immediate access to all data on their computer monitors. In fact, monitor screens can be divided so that both kinds of information are displayed at the same time.

"What I've found most important in working with an outsource provider is that you have to have good communications and be able to iron things out. It's important to be able to discuss what you want to change or improve, and they have to let you know what new technology is available to improve efficiencies," Eldridge said.

Surrendering customer service

Outsourcing of the customer service aspect of hazard insurance is always a critical concern for management. This is the case because an outside third party represents you to your borrowers. This is especially critical when your borrowers are also depositors with your institution, as is the case at Coast. As Coast's provider, ASC creates documentation for Coast management on all services available, as well as information on policies, procedures and quality controls, and presents management reports on exceptions and activity ratios.

According to Eldridge, an outsource service provider should be committed to being a partner that is viewed as another entity within your organization. ASC sponsors semiannual user group seminars with all its clients to discuss new technology and services. In addition, users have the opportunity to critique and evaluate American Sterling's services and make suggestions at these two-day seminars.

Plaza Home's approach

Plaza Home Mortgage, headquartered in Santa Ana, California, has more than 80,000 loans on properties throughout the 50 states. These loans are serviced from a customer service center in Albuquerque, New Mexico, that employs more than 90 people. (Fleet National Bank late last year announced plans to purchase Plaza Home Mortgage and take over its servicing portfolio.)

Mike Koepke, vice president of customer relations, explained that hazard insurance processing, if not automated, is probably the most paper- and labor-intensive task in the industry. For that reason alone, he's pleased that Plaza outsources all the procedures except for customer service, which his group handles directly. Koepke says that outsourcing the task of managing and updating hazard insurance information is a cost-effective and important aspect of Plaza's operations.

"There are literally hundreds of thousands of documents associated with insurance processing," Koepke said. "Without image-processing technology, the task appears insurmountable. The imaging technology and processing provided by ASC is relatively new, and most people in the industry don't really understand the technology or how to implement it in a cost-effective manner. That isn't the case with ASC, which has developed a system that easily and effectively integrates into its customer service operations. Many of us rely on outside service bureaus for much of our data processing requirements anyway. Plaza is on-line with CPI of Jacksonville, Florida. Because of ASC's advanced telecommunications electronic data interchange [EDI] technology, communications between CPI and ASC are facilitated at real-time performance levels. In addition, PCs and workstations at the Albuquerque Customer Service Center receive updated information in a very timely manner."

Much of the imaging technology available today is from companies that have developed partial solutions that operate in a proprietary environment, making it difficult to integrate the information into existing systems and data bases. American Sterling's solution is a nonproprietary imaging platform that operates in a relatively inexpensive PC networking environment, yet can still be easily transferred into another computer system's data base. This enables the literally thousands of different insurance documents to be entered into a system without the extremely taxing task of manual data entry.

The hardware components for a basic American Sterling document-imaging processing system might include: a 486- or Pentium-based file server and OCR (optical character recognition) engine; a LAN (local area network) that also links to a host mainframe; large-screen workstations; a couple of high-resolution scanners; a laser printer; and about a 1.2 gigabyte data storage subsystem and a Digital Audio Tape (DAT) system for archiving.

New data center

In June 1994, American Sterling brought on-line its new data center at the company's new headquarters in Irvine, California. The data center was built from the ground up to provide maximum data processing capabilities for its more than 2 million loans, and to handle increased capacity in the future. It provides complete on-line service resulting in instant access to all insurance and loan records, as well as major technology improvements expanding system redundancy, and backup for all data and power supplies. In addition, key components of the data center are constantly monitored, and if there are component failures, the maintenance provider is electronically notified, allowing repairs and service to commence immediately. Most service occurs virtually transparently to ASC and its customers.

"We're an information processing company, and our product, to a large extent, is our data processing services," said Michael Thompson, chairman and president at American Sterling. In designing the data center, with the help of IBM, business volumes were fully analyzed and a powerful computing environment for the future was established.

Several different technologies - from IBM mainframe computers and massive disk-storage systems to a high-performance microprocessor server-based client/server network - are now employed in the data center. All the technologies, inducting the specially developed document image data-capture system designed by ASC, are melded together to provide optimum system performance. Due to the nature of hazard insurance processing, data backup and system redundancy are critical elements to performance, Thompson says. Because of the substantial costs required to maintain a high level of data integrity, it isn't feasible for many mortgage providers to undertake these ongoing investments.

In addition to the mainframe processing and client/server networks, there are also departmental networks that provide for work group processing. Again, these networks constantly communicate with the centralized mainframe data bases. The mainframe supports data throughout at 10 megabytes per second, as compared with the 4.5 megabytes per second of most mainframe systems.

"We basically had three main goals when we designed our data center and peripheral networks," said Thompson. "First, we wanted maximum utilization and modular expandability of the computer systems; second, we wanted to eliminate as much paper as possible; and third, we wanted the best telecommunications capabilities available so that our computers could communicate with optimal flexibility and speed with the computers of our clients and partners."

For optimum telecommunications internally, ASC completely rewired its new building with an all-digital telephone system and an intelligent cable scheme featuring a fiber-optic backbone. Each workstation is pre-wired for simple plug-in access to voice, LAN or mainframe services.

In communicating with its customer base across the nation, ASC uses several electronic data interface systems, including the Advantis Network. Advantis provides tremendous communications capabilities without having to incur the heavy infrastructure costs otherwise required for vast nationwide EDI telecommunications.

Thompson also noted the productivity benefits of ASC's custom expert system software which the company developed for its mainframe applications. This rule-based expert system automatically manages and matches insurance documents to the thousands of procedures mandated by over 850 insurance companies that generate the documents ASC has to process. By eliminating the need for data entry operators to constantly refer to thick procedure manuals, the expert system has achieved tremendous processing efficiencies.

Further investments by ASC in data base management have resulted in the mainframe being able to serve as a virtual on-line information warehouse. This permits files with as many as 20 million records per file to be processed, updated and reviewed in real time, at any time.

The benefits of advanced technology are becoming evident throughout the mortgage banking industry. Technology is bringing greater control and efficiency at reduced cost. Plus, tremendous process improvements within individual mortgage companies are allowing tasks that used to take weeks, even months, to now be finished in a few hours. This trend is bringing irreversible change to the way business is conducted in mortgage banking. Those who embrace this change and use it to their advantage will emerge as strong competitors in the future.

Craig Curtner is the marketing director for American Sterling Corporation, based in Irvine, California.
COPYRIGHT 1995 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Cover Report: Technology; automated processing of hazard insurance information
Author:Curtner, Craig
Publication:Mortgage Banking
Article Type:Cover Story
Date:Mar 1, 1995
Previous Article:Puzzling over point-of-sale.
Next Article:Understanding strategic technologies.

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