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Those who fail to learn from the past are doomed to repeat it. And the banking industry offers a compelling example.
The current credit crisis is just the latest of many banking debacles to unfold over recent decades as past experience has failed to guide future behavior. Experts say it was all too easy for lenders to get caught up in the whirlwind of activity surrounding a booming housing market. Blinded by the sheer volume of lending activity, many banks opened themselves up to tremendous risk -- for which they now are paying the price.
Yet lending technology -- particularly on the retail lending side -- has made huge strides in automating and streamlining the onerous mortgage origination process. With so many solutions at their disposal, how was it that bankers and other industry participants did not foresee the gloom to come? One thing is certain, insiders say: The mortgage industry will see intensified product development on the solutions side in the coming months. Exactly how long the systems improvements and beefed up underwriting practices remain in play, however, is the stuff of future history lessons.
Don't Blame Technology
The industry isn't ever likely to learn from the past, contends Art Gillis, president of bank technology consulting firm Computer Based Solutions (Dallas). "It happened before, it's happening now and it will happen again," says Gillis, who has covered the banking industry for nearly 40 years and is a regular contributor to BS&T's blog (www.banktech.com/blog). The problem, he says, is that bankers need to think more than they do.
"The banker's psyche is one of a mechanic," Gillis explains. "Mechanically, they're very good. The trouble with banking today is that they have the best technology in the world for processing trillions of transactions and coming up with reconciliations. No one, however, looks at this and asks why we do these things. They're just worried about the mechanics."
Still, Gillis adds, he was astonished by the speed with which loan defaults appeared. "Things like this shouldn't be so quick and devastating," he asserts. "How are banks making their judgments? You have to factor in all the technology, but you also have to bring together the people and figure out why the technology is saying one thing and why the people are saying something else, and then find a middle ground."
After all, "Technology is only as good as the people that know how to regularly use it," adds David Zugheri, president of Houston-based mortgage company First Houston Mortgage, which originates approximately 2,000 loans a year. "There is plenty of great technology that could have kept this whole crisis from ever happening -- from fraud prevention technology to real-time product and pricing engines."
John Blake, president and CEO of Many, La.-based People's State Bank ($440 million in assets) is even more blunt. "Credit problems in banks are always caused by the people in the bank," he contends. "You can't get around [the fact] that, regardless of how technologically sophisticated the bank is, there's no substitute for sound bank practices."
The lack of thorough underwriting practices and due diligence -- not the lack of technology solutions -- led to the breakdown in the lending industry, agrees Jack Pence, VP, strategic alliances, with Fiserv Lending Solutions (Brookfield, Wis.). "The technology tools have been there the entire time," he explains. "We had fraud detection, compliance tools, automated underwriting, decisioning engines, workflow tools. It's the credit policies, product design decisions and internal procedures in terms of how the lenders ran the technology that led to these problems."