Sunday, November 21, 2010

How did Robo-Signing happen?

When I worked as a loan processor for a local bank about couple years ago, there were two kinds of shortcuts I at least once took or played a part in when processing the paper work.

The first had to do notarized documents. Certain documents had to be signed by one, sometimes more than one, bank officer. I would take the documents to the eligible officer(s), have them signed, and then drop them off at the desk of a fellow employee who had the misfortune of being both nice and a notary. (Some of the nice people were not notaries, and some of the notaries were true grouches, so the nice people probably got more than their fair share of documents to notarize.) The notaries would look at the signatures because they recognized the signatures and notarized them, attesting to the fact that they had seen the officer sign the document, even though they really hadn't. I picked up the documents and continued to process them.

The second shortcut I did only once. I was processing a refinance loan for a person who was self-employed. Part of the refinancing process involves calling the applicant's employer. I either didn't know or was willfully ignorant that the "employer" I called was actually the loan applicant. And so I credulously wrote down his assessment of his own income, which is a big no no. The loan officer in charge of reviewing the loan application caught what I had done, and informed me of my mistake (I had only been on the job a few weeks and had no prior experience, so I wasn't punished). He simply told me that in cases where someone was self-employed, we had to use a different process (in this case, call his accountant to verify income) and made me correct my error.

These two types of shortcuts were different. The first was not technically the right thing to do, but was so close to technically the right thing to do that the officers of that bank and the notary(ies) would not face much if any trouble if a regulator had called them on it. Of course, if I, as a loan processor, had forged a bank officer's name on one of the loan documents (because, say, I was in a hurry to go home and couldn't find a qualifying officer), that would have been quite a different story, and by doing so I could have, would have, should have been fired. (This first type of shortcut reminds me of another shortcut taken when I was a bank teller. The tellers were divided into two groups of people, and the members of each group each had a set of keys to the vault unique to that group, so that, if someone wanted to open the vault or one of the protected lockboxes--such as the box that held blank traveler's checks--theoretically two people were needed. This was the concept of "dual control," premised in part on the notion that it's harder for two people to conspire to rob the bank than it is for one person. In practice, however, if a teller from one group needed to access the traveler's checks box, he/she would simply ask a teller from the other group for their keys.)

The second type of shortcut was simply wrong. I don't know precisely if it was a federal regulation, a state regulation, or an internal regulation (probably a combination of all three) that required us to verify income in certain prescribed manners. But simply taking the type of shortcut I had taken was wrong, and I should have known it.

I suspect that certain banks' alleged practice of "robo-signing" may have originated as a shortcut of the first category. "Robo-signing" was the practice of some large banks to process their mortgage and foreclosure paperwork without doing the appropriate verifications of income, etc. And the discovery/disclosure of this practice have prompted calls for moratoria, some voluntary others mandated, on foreclosures in some states. So many documents were being processed (probably) and certain things that had to be signed and verified took on a certain pro forma quality so that these large companies fell into the practice of simply signing off on things that had to be verified. The rules, technically construed, did not allow for this, but I suspect that the companies that engaged in this practice thought either that it was standard industry practice or that it was worth a risk: the increased "efficiency" from robo-signing was worth the risk that a foreclosed person's attorney would not find the error (and, more perniciously but probably never explicitly stated in order to claim plausible deniability, that people facing foreclosure were unlikely to afford the legal representation of their interests that would root out technical violations). The lapse into "robo-signing" was also, I suspect, made easier by the practice of bundling mortgages and selling them to different banks (a process I only dimly understand).

Although I suspect that "robo-signing" began as a shortcut of the first type, it obviously (to me) came to function as a shortcut of the second type, especially as the practice of foreclosures, at least by the banks implicated, is being called into question. (I have heard that a reader must beware when a writer uses the word "obvious" or "obviously," because such usage often signals that the point is not obvious at all. Still, this is my blog, and I'm making the claim.)

For what it's worth, I don't really have a problem with the fact that people facing foreclosure are challenging these allegedly robo-signed mortgages. These people would be on the hook for technically violating their mortgage agreement, and while banks often would prefer to continue accepting mortgage payments rather than resorting to foreclosure (banks probably don't make as much money on foreclosures as they lose by engaging in the process), banks would not hesitate to cite technical violations when resorting to foreclosures is convenient for them. Banks, after all, have lawyers on retainer, and the larger banks have legal divisions that advise them on this stuff, something actual homeowners usually don't have. I also think the "moral hazard" of a moratorium on such mortgages is almost nil: I can't imagine someone irresponsibly taking a mortgage in the future on the off chance that his or her bank will engage in improvident processing and that any subsequent foreclosure proceeding against them would be delayed for about three or six months.

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