Thursday, January 24, 2008
The litigation fall out from the subprime mess is going to be a big topic for property profs. (Longtime readers might remember that I predicted a part of the mess back in the fall of 2005). Dave Redden has an interesting post on the subject that highlights some interesting issues regarding underwriting incentives and fabrication of truth-in-lending documentation:
Several volunteers in the Twin Cities area have gathered together to provide legal services to homeowners facing foreclosure. I sat in on their meeting yesterday, which was very instructive, but I heard something that struck me funny. Sometimes clients insist they haven't received a particular letter or form but the attorney is stuck in a situation where there's no real proof. I previously worked for an insurance company owned by a major mortgage lender involved in sub-prime lending and I propose that proving documentation is fabricated may be less difficult than attorneys thinks. I also bet that mistakes like this are going to be widespread such that successful TILA challenges will be fairly common if mortgage documents are given the proper consideration.
That mortgage lenders are fabricating documentation is beyond dispute. Sometimes a watchful eye will catch a tell-tale sign on the letter itself, but most times there doesn't appear to be a way to tell. There is. Most of the major lenders are probably on "paperless" electronic systems where all the documentation is maintained digitally. When documents are stored this way there are two types of information stored: the document itself with all the information on it, and a body of information about the electronic file - metadata. This metadata has information like when the last change was made to the file and, more importantly, when the document was created, or at least imaged into the system. When attorneys request documentation either before or after discovery, they should request metadata on each document, including but not limited to when each document was generated or added to the system, clearly indicating to which document the metadata is referring.
A feature of most digital document management systems is the ability to "annotate" on the digital document - to mark it up and make notes on it like you would with a pen on paper. When the documents are printed to paper during discovery they can be printed with or without annotations. In addition to a clean, non-annotated copy of all documentation, attorneys should request that the mortgage lender print a separate copy of all documents containing such annotation or maybe "all digital notations contained and/or maintained as part of or in connection with the digitally stored subject document."
Lastly, let me tell you why I think TILA violations will be more widespread than you might expect. When I worked in part of this major mortgage lender I sat near the "closing unit." This is the last step in the mortgage process - the broker or loan officer has solicited the loan application, it's made it through document verification and underwriting. The closing unit reviews all the final documentation to make sure everything looks in line then cuts the checks. At this lender it's a pretty young crowd, with lots of people in their early 20's. Many of them are part-time employees. Now that alone doesn't make for an error-prone department, but when you take a minute to examine their incentives you'll understand why I think they are.
Every day I worked next to them I saw they were provided with high-sugar, high-caffeine drinks and snacks. They had all types of soda (tons of Mountain Dew), chips, and such. At lunch time they'd always have pizza, Olive Garden, Mexican food - you name it - brought in and not the cheap stuff either. Real food from sit-down restaurants where you leave tips. It became particularly gluttonous around the end of the month. I asked about it once and was told that most of the restaurant food is provided by loan officers. A lot of times it was a branch office that got together and chipped in to provide lunch to the closers to "show their appreciation." They probably also did it to encourage the closing department to get the loans buttoned up before the end of the month so the loan officers would get their commission on their next paycheck.
Volume was the big driver - they wanted to fund $x,xxx,xxx,xxx of loans that month, beating last month's record. If they did, there would be a tremendous celebration. The department was moved to Arizona from California, because in California you have to pay OT if they work more than 8 hours in a day. In Arizona your employees can work more than 8 hours a day and earn no OT unless they work more than 40 hours in the week. This way they could really stack up the manpower toward the end of the month when they were pushing to meet or beat their goals.
Given the volume they were producing, the people the were using to produce it, and the incentives they had in place, it's hard to imagine that there wasn't a whole lot of stuff slipping by. I don't doubt that the underwriters were subject to similar pressures. I also don't doubt that these were the same sorts of things going on at other banks. In the mortgage business, when it's boom time you have to push people to produce but still encourage a transitory workforce because some day the boom will end. No matter how much lip-service managers pay to it, quality will always take a back seat in these situations, at least to the extent that it doesn't effect the bottom line too much.
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