The growing push for paperless lending is adding fuel to the misconception that imaged loan documents and electronic loan documents are one in the same. This is due in part to attempts by document imaging vendors to muddy the waters. However, the most prominent reason is simply a lack of industry education, even among the most tech-savvy lenders.
There are some big differences between imaged documents and electronic documents. First, electronic documents are documents that never existed on paper. They were created, populated and signed electronically. There are no paper stacks to store.
A scanned image of a paper loan file is not an electronic loan file. It’s a picture of a paper loan file. The data stored within the scanned loan file are hardly easier for a computer to read than the data within the actual paper file, despite strides in optical character recognition (OCR).
Sure, imaging has its benefits. Imaged documents can be accessed from anywhere, easily audited and drastically reduce the number of human beings who actually have to touch the paper loan file –- all good things. However, imaging’s potential is limited.
There is no purer form of data than electronically-originated financial documents. While imaged documents can include indexed data, the indexing processing requires wasteful data re-entry. Also, typically only a handful of available data points are indexed.
Purely electronic loan data can be accessed from anywhere and easily analyzed, both individually and in aggregate. It is the ability to fully manipulate all of a loan’s electronic data that enables banks, ratings agencies, investors, regulators and others to determine the true risk –- and thus, the true value — of an asset.
Fortunately, the recent recession has brought light to the fact that paper-based lending is an expensive, inefficient and risky way to make loans. As financial institutions look for better solutions, they will likely consider several new processes and technologies. However, comparing imaging to electronic only adds confusion.
Avoiding another financial crisis will boil down to transparency. Transparency can only be achieved by providing investors with the data they need to understand the full picture of a loan’s risk. The breadth of available data in a loan document can only be easily made available if the documents are fully electronic, from end-to-end.