Automation Helps Reduce Delinquencies

Published in Consumer Lending Report

When asked what their delinquency rate is, most retail lenders are hard put to come up with accurate figures - mainly because figures are often not readily available. Losses due to poor management are difficult to calculate, but the effects are undeniable.

Eric Christeson, chairman of Los Angeles-based Dynamic Interface Systems Corp. (DISC), recently talked with CLR about some of the problems bankers face with delinquencies and how they might be solved. Lenders may not be aware of the scope of their delinquency problems, he says, because compiling reports is time-consuming and expensive, so they tend to be drafted infrequently and are generic in nature. As lenders spend more time on unnecessary checking and cross-checking, what happens, according to Christeson, is that delinquencies increase, cash flow diminishes, and customer service deteriorates.

He agrees that timeliness is vital but contends that reports are useless unless the hard data is processed so that it can be used to anticipate potential problems, identify trends and manage a loan portfolio more efficiently.

This process, while cumbersome, can be eased considerably by computerized programs that track loan histories and provide lenders with vital information.

Flexibility is the key. There is little standardization in loan servicing techniques. Every bank has different requirements to which data processing systems must respond in order to be effective.

A flexible PC based system will give lenders more time to make and service loans, rather than labor over their maintenance. When unexpected contingencies arise in a loan portfolio, the flexibility of the software is tested.

That's what happened when the Citizens Bank in Clarksville, Texas purchased some loans from a defunct savings and loan, but Citizens' mainframe software could not handle the new portfolio because all of the loans were calculated on a 360-day basis, and the system was set up for 365-day calculations. In addition, the delinquency rate went up immediately, according to Cochran.

Upgrading the mainframe software was prohibitively expensive. It would have cost over $100,000 to upgrade the mainframe software to meet our needs, said Citizens' president Jim Cochran in a recent telephone interview with CLR. "Our existing software is five years old, but it is well suited for all other bank functions, so there was no immediate need to upgrade", he noted.

The $25-million-asset bank decided to install LOANLEDGER software from DISC. Finding a real-time, PC-based software system that would integrate with the bank's mainframe computer was not easy, according to Cochran.

Some of the features of the new software include:

Training capability: The fact that the system is "menu driven" allows clerks to train on the system simply by following the menu and help screens, thus keeping training costs and time to a minimum.
Data Security: The system has up to nine levels of password protection.
Variable repayment schedules: The software produces schedules weekly, biweekly, semimonthly, quarterly, semiannually, annually, and, of course, monthly.
Interest calculation: It has the ability to calculate interest on a 360- or 365-day-per-year basis.
Ability to produce required government reports: The system automatically prints 1098 forms as well as annual letters to members listing interest and late charges paid.
Loan history reports: The software produces loan aging reports for 30-60-90 days past due and individual customer loan ledgers with total loan histories.

Since the bank incorporated the additional loan portfolio into its new software system a few years ago, the number of past due loan payments has steadily decreased. In fact, Citizens' current delinquency rate is over 30 percent lower than before installation. "More important", says Cochran, "we have been able to gain greater control over our loan portfolio and the bank has been able to grow without adding additional support staff".