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Cumbersome stacks of paper used to be commonplace in servicers’ mailrooms when it came time to refr a foreclosure case to an attorney. Not any more. New software could help toss out the paper for good, as files get transmitted electronically.

One of the bastions of labor-intensive paper processing still left in the residential servicing business — the referral of foreclosures and bankruptcies to law firms — is about to be washed away.

Servicers will still have to deal with the nightmare of myriad state requirements, but all that paper soon may be history.

Now software has been developed to replace the stacks of overnight packages sitting in mailrooms with neat electronic files in computer work queues. One such software system is called Catapult[R]. In the best tradition of technological progress, Catapult was invented not by software entrepreneurs looking to make a fortune but by people who were slogging along, up to their knees in paper, to help them do their jobs better. Once it was found to work, it was simply too good to keep bottled up inside one firm.

Now the company that came up with the software, LOGS Financial Services, Inc. (LFSI), based in Northbrook, Illinois, is making its internal processing software available to any mortgage servicer, law firm or third-party processor of foreclosure and bankruptcy referrals. The company is also investigating ways to extend the technology to cover referrals for inspections, appraisals, title searches and REO (real estate-owned) management. Competitors are sure to follow suit and bring other software options to this market. In fact, Barrett Burke has a more generic product that can send images but has no scanning or indexing function, and Lynstar has a generic product that can send electronic data but no images or documents. Neither system offers a wizard function to define rules, as Catapult does.

Before

Before Catapult, our mailroom would get packages every day from Fleet Mortgage, our largest client, recalls Lori Luebke, bankruptcy senior manager in the Milwaukee office of LFSI. Inside the packages were stacks of manila file folders, each one containing documentation for a delinquent mortgage that needed to be forwarded to attorneys to begin foreclosure proceedings.

After the mailroom distributed the folders, we would go through them physically to see if everything was there, providing a quality assurance review of the file. If the foreclosure was in one of the 15 states that require original documents, we would request those documents and hold the file for a week or more until they arrived. Files in process were kept in a bank of pigeon holes, slotted for the various law firms to which they eventually would be sent, says Luebke.

When the documentation was complete, we would print out a cover letter and create another package that would be sent, usually overnight, to a law firm, where their mailroom would have to distribute it and their staff would have to open the package, handle the documents and manually key the pertinent data into their system. Then they could start the foreclosure proceedings, she explains.

To guard against files being lost in the mail, Leubke’s staff would make duplicates of all the forms and documents, which meant standing at a photocopying machine for hours and copying anywhere from 50 to 70 files a day. Each file contained up to 40 pages of microfiche documents. That meant roughly 2,500 pages had to be photocopied each day. It took 10 people to do the whole job of receiving, reviewing, collecting, copying and shipping the files for Milwaukee, Wisconsin-based Fleet’s foreclosures. Turnaround time was five to seven days, Luebke says.

How it works

With the introduction of Catapult 14 months ago this process was changed dramatically. LFSI now links its Catapult system with the Fleet Mortgage servicing system so that cases ready for referral are recognized and all the relevant data on Fleet’s system is downloaded overnight into Catapult. The documents still come in as paper to the LFSI mailroom in Milwaukee each day and have to be distributed, opened and processed. But now, instead of doing the full data entry to create a file, the downloaded data files are matched with the paper documents.

And those documents, instead of being collected, arranged and photocopied, now are scanned and converted into digital image files that are incorporated into one master referral file. Paper documents are unavoidable for the 15 states that still require original documents, but all others can be digitized at the scanner. LFSI is looking into ways the documents could be scanned at Fleet and then downloaded, completely eliminating the paper handling at LFSI for mortgage companies like Fleet and affiliated law firms linked to the LOGS network.

We’re working to make it totally paperless, Leubke says. Documents scanned by the servicer need never leave the vault, she points out.

Once an electronic file is complete and ready for referral to a law firm to begin foreclosure proceedings, the files are upstreamed to the computer at the LFSI corporate offices in Northbrook. Then, every two hours, files are distributed electronically to the appropriate law firm within the LOGS legal network. When referrals are sent to independent law firms outside the network, they still have to travel the oldfashioned way, but that will change eventually as the reach of Catapult is extended through dial-up and Internet options.

The payoff

The payoff for Leubke and her staff has been substantial. The staff needed to refer Fleet’s foreclosures has been cut by more than half — from 10 to four. The average turnaround time it takes to get a file from Fleet into the hands of its attorneys has been cut from more than a week to less than two days (when LFSI doesn’t have to wait for original documents to arrive). This is a result of installing Catapult and reengineering certain internal processes, Leubke explains. Our official standard is 48 hours, but most of the time we get the files in and out the door in less than 24 hours, she says. Productivity has soared. An LFSI referral specialist now can refer eight files an hour, compared with just one an hour before software automated the process.

Luebke, one of the original users of Catapult, also had a lot to do with designing it. She played a big part by telling the programmers exactly what the software needed to be able to do to help her staff do their jobs better, quicker and more economically.

Programming Catapult to recognize all the filing requirements for the various states has expedited the file-review process, making it both quicker and more accurate, she says. We are prompted for missing information, she says. It now takes us just five to 10 minutes per file to satisfy Catapult’s logic wizards and launch the referral. Scanning documents takes a clerical person four hours, tops to handle 75 to 100 files a day, she says.

Such automation, in many cases, gives the foreclosure process at least a week’s head start. That is important to all parties, particularly to mortgage servicers like Fleet. Many of the mortgages have been bought and used to collateralize mortgage-backed securities by conduits like Fannie Mae and Freddie Mac. These agencies, as well as the Veterans Administration (VA) and HUD for VA and FHA mortgages, have timetables requiring speedy initiation of foreclosure procedures once certain levels of delinquency have been reached.

Cutting a week off the referral process is a major benefit to investors and insurers, Leubke says. We’ll be missing a lot fewer deadlines because the field counsel offices are getting the referrals so much sooner. It gives them more time to do their jobs.

Catapult has saved Fleet almost $1 million annually, she says. After all, a loan that is ready for foreclosure is a nonperforming asset. The sooner it can be turned into a performing asset, the sooner the financial drag will end. Fleet has to front the interest every month the borrower doesn’t pay, Leubke says. It saves them time and money to get the foreclosure into the pipeline faster and get back the proceeds of the foreclosure.

The law firms save time and effort, too, from receiving an electronic file instead of a stack of overnight packages that have to be opened, reviewed and then used for manual input to create files on their own tracking systems. As soon as field counsel receives the file, they have everything they need to start the foreclosure process, Leubke says.

The law offices getting referrals through Catapult confirm these benefits. Receiving and handling a paper referral file and manually entering relevant data into the tracking system of Colorado Springs-based Shapiro & Meinhold, a LOGS network firm that covers four western states, would take, on average, at least 15 minutes, estimates Julieann Entwistle, foreclosure technician with Shapiro & Meinhold. The electronic file takes less that five minutes to set up — just three fields in which to enter data, says Entwistle.

Using Catapult definitely saves us critical time, Entwistle adds. We have first actions to file, and the sooner we get the file, the sooner we get started, which means fewer penalties for filing late. Those penalties, imposed by the VA, HUD, Fannie Mae or Freddie Mac, are monetary fines. Someone, usually the law firm, has to pay a certain amount, based on loan size, for every day the filing is late, so speedy referrals save the law firms real money, according to Entwistle.

As a user, Entwistle is particularly pleased with an e-mail feature that can be used to initiate a title search when the search firm can accept e-mail. She just has to click on the right icon, and Catapult populates the e-mail message with the relevant data. No more waiting a day or two to find time to manually compose lengthy e-mail requests for title searches.

Client satisfaction

On the front end of the process, servicers also are pleased with this new automated approach. For Paul Baumgartner, vice president of asset management for the Fleet Mortgage Group, the 1995 decision to outsource the foreclosure referral piece was a case of finding a way to increase our operational efficiencies, and therefore, our bottom line. Foreclosure and bankruptcy referrals were labor-intensive, specialized and not a core competency — a classic definition of something that could be farmed out to a specialist that might eventually bring more automation to the table.

When LFSI introduced Catapult in April 1998, it did not eliminate a lot of manual processing for Fleet’s staff; it essentially automated what LFSI had been doing all along, Baumgartner says. But it was instrumental in helping Fleet shave 12 to 14 days off our average foreclosure referral process, which amounts to significant savings over time, Baumgartner explains.

Only about half of those nearly two weeks are due to Catapult. At the same time they were implementing the software, Baumgartner’s staff was skinnying down the package of documents it would initially refer to foreclosure attorneys. Over time, too many exception documents had become part of the standard package, which had led to documentation overkill, he says.

Baumgartner echoes Leubke and Entwistle when it comes to the value of speeding up the process. Both the investors and the insurers require us to start action by certain deadlines. It’s easy to miss some of those deadlines when you rely on snail mail, he says.

Fleet has found another benefit from the switch to elec tronic documents. More of the original documents remain safe in our custodial vaults, says Baumgartner. We’ve cut down on the number of documents that are lost, misplaced or temporarily unavailable because they are at the field counsel’s office or in transit somewhere. Having the documents on hand is valuable, he explains, because many of the mortgages reinstate after we start action.

Similar success in Florida

LFSI’s Florida operation reports similar benefits from automation. For two large Jacksonville, Florida-based mortgage servicing clients, HomeSide Lending and Alliance, the Jacksonville office of LFSI processes nearly 2,000 foreclosure referrals a month. Data that used to be collected piece by piece from the servicer’s database is now gathered automatically by the software. Documents once photocopied, then physically assembled and shipped, are transmitted as electronic files.

Each scanned document (typically the note, the mortgage, the title policy and related documents) is identified by a separate bar-coded lead sheet, so that Catapult recognizes what is — and what is not — in the file. Catapult will know that we’ve put eight pages of a mortgage in the file, says Stephen Salkau, LFSI Jacksonville unit manager. It knows what is required for a foreclosure or bankruptcy filing in each state, and it anything is missing from a file for a particular state, we get a prompt on our screen reminding us to add it.

If the referral goes to a LOGS network attorney, one that would be connected to the firm’s wide area network (WAN), then we simply click and send the assembled file, through our main office in Northbrook, and the law firm has the file that afternoon. It automatically sets up the case in their foreclosure system, so they no longer have to enter it manually. They’re ready to start work on the case the same day we send it, Salkay explains.

Because the files, with all the digitized documents attached, are quite large, transmissions generally are limited to parties linked to the LOGS’WAN. Even a high-speed modem would be too slow to convey many files efficiently, especially given the volumes handled by the major law firms in the LOGS network, Salkay says. Most referrals to non-LOGS law firms are still assembled and sent as packages of paper, but most of those offices will be on Catapult in the coming months.

According to Salkay, the savings from using Catapult has been estimated at $800,000 a year for HomeSide. This is mostly due to the interest expense saved by faster processing, but also partly due to eliminating costs related to errors and mistakes that are no longer made. And that is on top of the money saved by LFSI due to greater operating efficiency and reduced transportation charges. Using Catapult to handle seriously past-due loans from Alliance and HomeSide has allowed the Florida LFSI office to reduce staff by 20 percent (from five to four). Also, the reduction in overnight mailing fees alone would come to at least $5,700 a month, he says.

But most importantly, the high-tech foreclosure servicing helps LFSI stay one step ahead of the industry. We want to provide foreclosure and bankruptcy servicing that is quicker, cheaper and more efficient than anyone else can offer, Salkay says.

Speeding up the hand-off is clearly the main benefit of automation, but eliminating paper-based glitches is also important. Files can’t get lost in the mail — or in the mailroom, notes Teri Methvin, Southeast regional operations manager in the Jacksonville LFSI office. Documents can’t get separated from the referral file. And because we’ve eliminated manual data entry, keying errors don’t occur. Moreover, once scanned, the documents remain in the electronic file and are immediately available in cases where foreclosure is repeated for the same mortgage.

We would need to generate a new referral but not collect and rescan the documents in those cases, Methvin notes. And the quicker you can get title to property under foreclosure, the better you can prevent vandalism to that property, adds Sharon Litt, executive director of Florida operations for Tampa-based Shapiro & Fishman and office manager for the firm’s five Florida offices and 18 attorneys.

A business strategy

Catapult finally brings to fruition the long effort to extend EDI [electronic data interchange] to businesses’ relationships with their law firms. It was a missing piece [of EDI], and now we’ve done it, says Gerald Alt, senior vice president and general counsel of the parent LFSI. Nobody has ever been able to tie in the attorneys before, to this extent. This is the first truly integrated system to combine data and images and send it out in a coherent package, he says.

It’s no accident that LFSI focused on the attorney-mortgage servicer interface, because it started as a network of law offices that handled mortgagerelated filings. When the company was put together 27 years ago, LOGS (as the company was then known) was an acronym for Law Offices of Gerald Shapiro. Legal services is still its primary line of business through its 38-state network.

LFSI was organized in 1992 to do a better job of capturing legal referrals and funneling them to LOGS attorneys. LFSI offered outsourcing to relieve mortgage servicers of the routine work of collecting all the documents they would need to work with a mix of different law firms and conform to an eclectic set of state requirements. Not coincidentally, it proved an effective way to capture more foreclosure business. But once LFSI had signed up major clients like Alliance, Fleet Mortgage and HomeSide, not even its 51 network law offices had the geographic reach to handle all the referrals, and LFSI began to work with law firms outside the LOGS network.

Catapult was a logical effort to automate the processing chain and integrate operations more efficiently with the mortgage servicers that generated the foreclosure and bankruptcy referrals. Until last February, it was an internal resource only for members of the LFSI family. Now the software is available commercially to anyone, including foreclosure and bankruptcy outsourcing service firms that compete with LFSI and law firms with no ties to LFSI or LOGS.

It started as a captive product, but once we recognized the impact, we wanted to extend it to other non-LOGS counsel we use, and then openly to anyone who wants it, Alt says.

We developed Catapult to differentiate ourselves from the competition, but we think this technology should become the standard by which all players do business in foreclosure and bankruptcy referrals, Alt adds. Its days as a closed-end delivery system strictly for the benefit of LOGS network attorneys will be over soon.

However, because Catapult is essentially hand-off software, it would be useless for either end of the referral process to use it alone, Alt says.

Financially, it would work this way: When we sell Catapult to a servicer that does no business with LOGS, we would install and maintain the system like we do for our existing clients, but charge them a transaction fee for each case we load and push through the system, says Alt.

Within LFSI, the focus is now on bringing Catapult to the second tier of mortgage servicing customers. We are now working to install Catapult with another six to 10 clients of LFSI, Alt reports. We started with the three clients that had the highest volume of referrals. Now we’re working down.

So far, all electronic transmissions have gone as compressed files sent over the LOGS’ wide area network, Ah says. He adds, We are now building a secure Web site which should be operational by June, so that files can be delivered over the Internet through file transfer protocol [FTP]. While law firms that get a large volume of referrals probably will find it more economical to link to the high-speed WAN, infrequent or low-volume users might prefer to go to the Web site at their convenience and pull down files stored in a secure electronic mailbox, he says.

Building a better mousetrap

It took Nicholas Solomon, director of information services for LFSI, and two programmers on his staff about two years to build Catapult. He says the system was built one block at a time, using object-oriented language. It contains more than three dozen separate programs configured so that if one fails, the others will take its place and maintain the processing, he explains.

Catapult is a 32-bit Windows[R] application that is clientserver based and Year 2000 compliant. Its four current modules include a mailroom/check-in work station, an imaging work station, a referral specialist work station and an attorney work station, with applications for both foreclosure and bankruptcy referrals. Loss mitigation and REO management applications were introduced in June 1999.

It was built to add value to LFSI’s outsourcing operations and provide a quicker, more reliable method for delivering referrals. We wanted something that would track all outgoing referrals and also the progress of delivery — something better than just mail it and hope it gets there, Solomon says. Before Catapult, it might [have taken] five to 10 days before anyone realized that a case we had sent never arrived.

Part of the programming required recognition of the specific legal requirements of different states and making sure Catapult would tailor its prompts to the particular state where the filing was occurring. But the most difficult part was interfacing Catapult with the mortgage servicer’s system — the database on which Catapult feeds — so that it could read that system correctly and extract the right files and documents for referral. Everything has to map correctly, Solomon says.

This is no plug-and-play application, which is the primary reason LFSI still has just three clients using Catapult. Another reason for the slow introduction, according to Solomon, is that because of the Year 2000 challenge, this is a bad time to try to get a lot of attention from mortgage company IT [information technology] staffs.

Bankruptcy module

Catapult started with foreclosures for Fleet Mortgage in the Milwaukee LFSI office in April 1998; two months later, it was rolled out in the Jacksonville office for Alliance and HomeSide. In April 1999, a new bankruptcy module was added that piggybacks onto the foreclosure module, but finds and loads different data elements in different fields, according to Robert Azroff, systems analyst for LFSI in Jacksonvill. HomeSide began using the bankruptcy application in May 1999.

The elements of a bankruptcy referral are similar — but not identical to — a foreclosure referral, Azroff says. Foreclosure is a predictable event in the progress of a delinquency, whereas bankruptcy referrals are triggered by an outside event that is not strongly correlated to other events. A loan might be current when a bankruptcy is declared, he says.

Catapult is programmed to sort bankruptcies by chapter and by state and apply the appropriate logic for each combination. A special wizard feature even recognizes quirks peculiar to specific counties or bankruptcy court districts that affect what the attorneys must file or when.

It’s programmed down to that level, Azroff notes. And of course it gives them the petition date, the dates when postpetition filings are due and the court the petition was filed in, which is not necessarily in the same state as the property. In bankruptcy, as in foreclosure, time is money. The shorter the process, the less interest is lost, Azroff adds.

For both foreclosures and bankruptcies, Catapult populates the referral fields with extracts from the servicers’ mainframe computers. The data is as good as what has been entered in the client’s system, says Azroff. Catapult generates the bankruptcy referrals the night after the bankruptcy filing has been recorded in the client’s database, so referrals are waiting for the LFSI staff to complete and transmit when they come to work the next morning. The data is not static as of the referral date but is refreshed every night based on changes made in the client’s mainframe, and fresh data about changeable items, like dates and monetary amounts, is forwarded to the law firm that received the original referral.

Although the first two applications were for foreclosures and bankruptcies, LOGS programmers are not stopping there. They are already looking into new applications. Now that we’ve done automated referrals for attorneys and shown that it works, we are interested in extending it to other vendors within the residential mortgage banking field, Alt says. Also under development is a system for returning electronic files once the foreclosure or bankruptcy actions have been performed, for claims and for archival storage.

Long after early predictions of the far-reaching effects that EDI would have on the mortgage business, EDI is inching forward in niches like mortgage foreclosure and bankruptcy referrals. Yet this progress is taking place not because of management dictates, but because it works. The benefits it brings are substantial in an arena of mortgage servicing that is ripe for the help. When the economy finally turns down again, this technology could well prove crucial to servicers as they battle a growing number of foreclosures and bankruptcies.

Gerald H. Shapiro is co-founder, chairman and CEO of LOGS Financial Services, Inc. in Northbrook, Illinois. By introducing a multistate network of title companies and law firms, and connecting them via a proprietary integrated software system, Shapiro invented the field counsel industry that serves mortgage banking. He is a member of the Mortgage Bankers Association of America and the majority of state mortgage bankers’ associations.