Document Imaging Benefits and Best Practices - Gonzobanker

Last week, my colleague Steve “Cassandra” Williams reported some frightening things regarding the level of debt owed by American consumers. (see “Bankers and the Bloated Consumer,” GonzoBanker, Jan. 21, 2005). According to Steve, financial institutions had best consider the prospect of future economic difficulty. What better way to do that than to improve internal efficiencies and deploy technological improvements that strengthen the lending administration function? (OK—maybe bolster your ALLL and then buy some new technology?) To put it another way, isn’t it true that the only thing worse than a debtor in bankruptcy is a debtor in bankruptcy whose lender has neither a clear title nor current insurance on the collateral?

We’ve seen clients struggling to improve the efficiency of their loan administration processes—which new technologies to adopt, how to implement them, and how to best utilize them once the implementation decision has been made. (for more on loan ancilliary systems, read “Secondary Is Primary,” GonzoBanker, May 24, 2002) One loan administration technology that is both intriguing and dangerous is document imaging. This kind of imaging is a technology loved by those who have successfully installed it, and despised by those who have experienced a poor implementation.

Why adopt document imaging?
By “document imaging” we mean “file folder” imaging, where images of 8-1/2 x 11 documents are scanned and stored electronically, instead of in large filing cabinets. So what can document imaging do for you? Lots of things—if you do it well. First and most obvious are the benefits in the lending back office. As any chief credit officer will attest, it requires significant effort to maintain good credit and collateral files. However, much of this effort can be automated, and document imaging systems are a good way to move in that direction. It is not uncommon to see personnel reductions of 50 percent to 75 percent in terms of clerical filing resources, along with significant lender and support staff productivity improvements, when it is no longer necessary to deal with physical paper.

Second, what are the are benefits to lenders? Certainly, there will always be lenders who cannot function without their own personal copy of key files (e.g. “shadow files”). While shadow files will probably always exist, the only thing better than a lender having shadow files in his or her desk is for every lender to have access to every file from their computer—home or office—knowing that they can quickly access all of them. (Yes, we can establish the appropriate security, so that only the appropriate personnel can access the files they are authorized to see.)

Third, with document imaging a copy of all files can be stored in an off-site vault daily, in case the fireproof vault ever turns out to be not so fireproof.

Fourth, everyone will be looking at current information.

Fifth, document imaging can provide significant benefits when regulators or loan review personnel must access files. We have seen examinations where the examiners spent the entire exam in a conference room, looking at loans on-line. Not one single piece of paper was handled physically. (Why do you care? They go home sooner. Why do they care? They get to go home sooner.)

Finally, document imaging systems are cheaper than large, heavy, expensive, powered filing equipment. We know of banks who have spent enough on power filing equipment to pay for a quality document imaging system several times over. If you’re in need of more file storage, it would be a serious miscalculation to buy more power files without considering document imaging first—and if your credit administration function isn’t already in the basement, it may well be down there as soon as your architect explains what the maximum load-bearing limit of the typical upper-story floor is.

Document Imaging Best Practices

1. Folder organization/structure is key. Visit several organizations that have successfully implemented a document imaging system before you select a system and learn from their experience. If your current credit files are not well-structured, correct that before you try to automate.
2. Don’t do a backfile conversion. Grow into it. Start by imaging only larger credits (which you are probably in and out of all the time anyway) and new credits, then add credits that are coming up for regular review.
3. Generally speaking, stay way from using temps or other “outsiders.” Your regular loan administration staff should know your customers and your policies, and I believe it is a mistake to introduce temporary staff into this environment and such a critical function.
4. Do some specific planning, organizing and file scrubbing before you image. It is our observation that most banks retain only the following original documents: original note, titles, and collateral held for safekeeping. These need to be stored in fireproof vaults; notes and titles filed together and collateral filed separately under dual control.
5. Develop a written project plan. That means a well-articulated project plan, with specific names of accountable staff members, clear deadlines, and key interim checkpoints where progress is measured and formally reported to management.
6. Make sure you image everything. Is your current file checkout system OK? Are you sure? If not, how will you know that you’ve imaged everything? At the end of the project, some organizations literally hand-verify the imaged files back to a loan trial balance to ensure that every folder is there.
7. Image where the filing/retrieving traffic is. Don’t ship paper around your company via courier if at all possible. Set up a centralized imaging system adjacent to where the files already are.
8. Don’t scrimp on scanning hardware. Good scanning hardware is expensive—except when compared to the “hidden” wasted labor that comes with inadequate scanning equipment. Imaging needs to be centralized for best utilization of high-speed scanning equipment.
9. Incorporate electronic workflow where feasible. Some imaging systems allow you to scan the loan application, establish a “file” for that borrower, and electronically route that file (and all subsequent additions, of course) all the rest of the way through the origination, closing, and funding process.
10. Get good training. Vendors typically do not make much profit on training, so resist the urge to be parsimonious. Good training is cheaper than doing it twice.
11. Be careful when mixing loans and deposits. Both areas require specialized expertise regarding the business functions surrounding the imaged documents. Both areas should be able to use a common system, but there will be some differences by function.

Cost-justification
It should be possible to cost-justify a document imaging system based on documented efficiencies, primarily labor savings and usually in loan administration. We have done ROI calculations with very favorable characteristics (think in terms of months, not years, for a full return of your investment) for loan document imaging systems. Cost-justification is harder to do when there are lots of consumer files (mortgages, cars, etc.) because there’s little in the way of measurable labor savings from retrieving/re-filing.

Some “Gotcha’s”

• Check with your state trade association for guidance as to paper retention. In some states, imaged documents are considered a legal document per explicit legislation. In other states, the law is not so clear and original documents should be retained “just in case.”
• Establish a rigorous Quality Assurance function which is completely independent of the scanning/indexing process. With imaging, poor quality is a killer.
• Describe the performance standards you expect up-front (such as end-to-end response times) based on current and projected scanning and retrieval volumes, and make sure your imaging hardware and communications network is robust enough to meet your needs.
• Clearly mark files that have been imaged (so no one uses paper once a folder has been imaged).
• Check out cards need to be revisited and files called for that are currently checked out. Only in cases of an eminent need should individuals be allowed to hold files in their offices once the imaging project is under way.
• Access to file rooms should be eliminated, or at least monitored closely. Only authorized file clerks should retrieve a file or insert documents into existing files. (Frankly, you should already be doing that!)

In Conclusion
Did you notice that I didn’t mention COLD imaging or check imaging? The functionality needed to image a loan credit file includes: many 8-1/2 x 11” documents, in color, with the ability to update each document while retaining the prior versions of images. These capabilities are quite different from the functionality needed to image hundreds of thousands of checks per month: no color, we never replace an image of a check with an updated image of the same check, and images are used only for historical and research purposes once statements have been rendered. And THAT technology is quite different from the technology needed to create images of stock paper reports, which are created daily, in page number sequence, with the same report names, and which have little or no graphic capabilities as is needed in a COLD system. Signature card imaging is different still: while it somewhat resembles document imaging, most modern check imaging systems also include signature verification/comparison functionality, along with sophisticated fraud detection features, that are unlike either document imaging, COLD storage, or check imaging technology.

There are some very nice imaging systems available, some of which can passably perform almost all of these different purposes, but most systems are strong in just one or two areas. Use the right tool for the right job—and do loan document imaging first, because it should have favorable payback characteristics and it will strengthen your loan administration procedures against the day when credit quality trumps all other considerations in bankers’ minds.
-bm