BLOG VIEW: It's rare that a week goes by that I don't read a headline about a big bank being fined billions of dollars for its alleged selling of shoddy mortgages. The most recent is Citigroup's pending $7 billion settlement agreement with federal prosecutors as a result of a probe into sales of mortgage-backed bonds before the 2008 financial crisis.
These banks have seemingly endless funds and can hire the best law firms in the world to defend them against the accusations, and yet, bank after bank is required to pay billions in fines. So why are they losing? Why aren't their lawyers able to back trucks of documents up to the doors in Washington, D.C., and cover the prosecutors up with discovery? In many cases, the documents that correspond to the sold mortgages aren't available. This inability to document the underwriting instruments associated with the questioned mortgages leaves the banks with a lack of substantiated defense – forcing them to negotiate their way out and pay whatever amount is demanded.
Following a nearly $1 billion settlement struck with SunTrust Mortgage earlier this summer, Attorney General Eric Holder called the bank's actions "a prime example of the widespread underwriting failures that helped bring about the financial crisis." You would think that over the past six years, these banks would have shored up their data and document tracking processes to avoid finding themselves in the same situation. Perhaps some of them have – or at least made the claim. In response to Holder's comments, SunTrust issued a statement saying, "Like most major financial institutions, we are addressing issues related to mortgage matters stemming from the financial crisis and recession period.’
The efforts of the major financial institutions are falling short. Securitization is back in the headlines. In order to truly fix these long-standing issues in the mortgage industry, there needs to be a comprehensive move to electronic documents and careful consideration of the critical relationship between data and documents. This means that data should be drawn directly from source documents to save time and promote accuracy, and a centralized data and document repository should be maintained consistently to prevent loss of intelligence over time.
Electronic documents should no longer be considered innovative. They are a must-have in any business environment. Banks will continue to find themselves in legal and regulatory hot water and paying out exorbitant fines as long as they are pushing and "misplacing" paper.
Floyd Kephart is co-founder and chairman of METIS Financial Network, a provider of enterprise management solutions.