What Were They Thinking?: Banks' Foreclosure Documentation Mistakes

While there has not been complete consensus regarding the causes of the subprime-fallout-influenced financial crisis, there is no disagreement that transparency, governance and accountability are among the watchwords of the post-crisis banking environment. Over the past two years banks of all sizes have been subject to intense scrutiny on the part of regulators, politicians, the media and the public. Accordingly, there has been a widespread effort to facilitate more visibility into processes and decision making -- and to hold line-of-business heads, IT management and other executives accountable for delivering on these goals. These efforts haven't been just rhetorical. Even as IT budgets remain tight, there has been increased investment in content management and customer communications systems, reporting capabilities, risk analytics, and business intelligence tools -- all of which can help prevent unpleasant surprises in the boardroom or on Capitol Hill.

It's not so much that banks are being held to a higher standard -- it's almost the opposite. In the post-crisis world, unfortunately, the common expectation is that financial services firms will not put their customers' best interests first; they will try to do what is expedient and economical rather than what is right. It's a sweeping generalization that penalizes many strong and well-managed institutions. One could hope, however, that the drive toward improved governance would start to put the industry on the road to redemption.

Not so fast. A number of prominent banks, including JPMorgan Chase and Bank of America, recently revealed that they are investigating foreclosure documentation problems -- including errors, fake paperwork and "robo-signing" of documents -- and in many cases halting foreclosure actions. At press time there was serious talk of a national foreclosure freeze, as well as speculation that these latest screw-ups would further hurt the already sickly real estate market.

Even after many years covering financial services I still can be surprised, because my initial reaction to the foreclosure documentation stories was, "You've got to be kidding me." It's shocking that, regardless of the volume of cases they had to administer, any bank would even consider cutting corners in processing foreclosures -- not just because it's wrong (which should be enough motivation), but because it's really stupid to do so when you are in regulators' and the media's cross-hairs. Did anyone really think these practices wouldn't come to light? What did management think transparency and governance meant? There are no shortcuts to process improvement -- or to credibility.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio