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APR 15, 2013

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What We're Hearing

Why We Still Cling to Paper-Based Lending

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WE’RE HEARING that a funny thing happened on the way to a radiant world of paperless lending: a lot of people decided they liked using paper.

Sanjeev Malaney, CEO of Capsilon, told me that a big stumbling block for lenders trying to embrace paperless lending is that their initiatives failed to make employees more efficient. Loan officers, processors, underwriters and everyone else in the chain of workflow over time has found ways to do things well with manila folders and hard copies of each loan document. Old habits die hard, and the advent of digital documents, imaging and computerized workflow didn’t quell a key instinct among industry veterans: the desire to hit the print button. In many cases, documents that get emailed in the origination process are quietly printed.

In 2004, Capsilon set out to understand why paper remained so pervasive in the mortgage industry. What the company found is that paper was easy to use and employees had a high level of comfort managing hard copies of loan files. The company’s study found that people often found it difficult to work on a document on their computer screen, which was not as tactile as paper.

“When you looked at how a loan actually got done, it was all moving paper around an organization,” Malaney said. “It actually slowed you down if you went paperless.”

Even in the secondary market, paper provided buyers with a level of reassurance that many found lacking in digital or imaged loan files. Lenders essentially were selling a FedEx package of documents backing a loan, not the loan itself, Malaney said.

But the benefits of paperless processes are becoming less abstract. Faster workflow, reduced shipping and storage costs, easier retrieval of documents—all this can add up to big savings if done right. Electronic delivery of loan packages means that lenders get paid faster for their loans, creating a strong incentive for lenders to go electronic.

With that in mind, Capsilon has focused on finding the “productivity lift” that was missing from the “paperless 1.0” stage of the industry’s move to reduce paperwork.

And with tens of millions of mortgage loans outstanding, paperless 2.0 is helping lenders scale their operations to handle increasing volumes again as the housing market recovers. The key to paperless 2.0 is finding ways to improve collaboration between parties in the lending process, Malaney said.

“What we found is that to manufacture a loan, there are probably at least a dozen organizations involved.”

To enhance productivity, paperless processes need to be capable of working across geographic boundaries. Capsilon also employs “viewing folders” to control who has access to given documents within a loan file. The paperless environment also enables an improved audit trail if questions arise about loan documentation.

“We had to make sure chaos was not created. Clearly if you have a paper folder, I’m in control of it if it’s on my desk.”

The “stacking” of electronic documents is also important to avoid productivity pitfalls, he said. Stacking orders so that the first document in a loan file is the loan application, the second an appraisal, and so forth make it easier for users to quickly locate what they need from an electronic file. Capsilon uses a taxonomy that ensures everyone calls a given document the same thing so that it can automatically be stacked in the correct order.

The lauded service provider has also employed automatic document recognition technology, which helps users jump to the spot they are looking for in a file.

In the paperless 2.0 environment, mini chat rooms can be created to facilitate collaboration on a loan file.

“You can very quickly zoom in on all these collaborations that happen within the workflow.”

Cloud computing enhances the opportunities for companies to collaborate electronically, Malaney said. Using cloud storage services, companies can share electronic documents without having to go inside each other’s secure firewalls. Cloud computing also has made paperless technology available to smaller lenders, who don’t have the tens of millions of dollars that some top ten lenders have spent to build their own proprietary architecture.

Like so many things in life these days, all it really takes to go paperless today is a computer and a connection to the Internet.

As the industry moves toward a “paperless 3.0” environment, more attention needs to be paid to identify “pain points” and places where time is wasted today, Malaney said.

And a new generation of borrowers and employees who grew up in a digital world will resist working with paper, just as previous generations resisted giving it up.

“The next generation of borrowers are not going to work with paper,” Malaney said. “You have to start building to collaborate with a whole new generation”

That paperless 3.0 generation will want workflow that facilitates text messaging and communication via social networks such as Facebook.

He estimates that the industry is about one third of the way to becoming truly paperless in the loan origination process. However, that paperless penetration drops sharply at the loan closing table. The percentage of transactions closed electronically is still in the single digits, he said.

Disparate technology usage by lenders is a stumbling block for closing agents, who typically work with many different lenders. Rather than learning how to integrate with all sorts of paperless systems and processes, most find it’s just easier to receive an email of a PDF file that can be printed out or have the documents sent overnight for the closing.

Ted Cornwell has covered the mortgage markets since 1990. He is a former editor of both Mortgage Servicing News and Mortgage Technology.

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