Saturday, March 26, 2011

A tale of two bank experiences in today's New York Times

How do I know when the weekend has truly arrived?  For years, the weekend arrived at the moment that I sat down to a leisurely breakfast while reading Joe Nocera's column (and I guess, after today, I'll just have to enjoy reading his op-eds instead).  This morning's column discusses the fate of someone who went along with the "everyone's doing it" ethos of liar loans (stated income loans--where the borrower doesn't have to substantiate his income).  That person's serving time in prison.  See here

Same page, farther down on the left-hand side:  Paul Sullivan's column on banks imposing insurance on borrowers, even when (1) there's no demonstrated need for that particular type of insurance (e.g., flood insurance outside the flood zone) and (2) the property is covered by that insurance already.  See here.

If I were a cynical person (stop laughing!), I'd marvel at how many different ways banks manage to game the system with impunity.  Let's see:  only borrowers, not lenders,* punished for liar loans; one department of a bank demanding insurance while another department assures the borrower that he's already covered by his own insurance; and my current favorite--banks refusing to credit mortgage payments to the loans for all sorts of untenable reasons. 

How do we get the system to change?  People won't change if there's no incentive to do so.  Financial penalties easily become costs of doing business, passed along to consumers as not even a speed bump in the company's business model.  We've got to get incentives to the right people, and I'm starting to think that we have to be much more aggressive with the officers and directors who tolerate these bad practices.  By "more aggressive," I mean the type of financial penalties that aren't paid by O&D insurance (and penalties that include prison time for the most egregious offenders).  We need to figure out an enforceable system of personal responsibility for people who don't fix systemic problems.  Start with the line folks who bounce their problems from department to department, infinite-loop style.  Move up the chain to managers who can't seem to see those systemic problems despite scads of customer complaints.  Keep moving up to department heads all the way to C-level officers and the board.  Everyone who routinely tolerates behavior that isn't a fluke needs accountability.  Until we come up with a way that links behavior with real consequences, we're going to keep seeing news reports like the ones in today's paper.

* Don't get me wrong:  borrowers who lie on their loans shouldn't get a free pass.  The rest of us didn't lie on our loans, and we're suffering from the fallout of other people's bad loans.

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