Two years ago I wrote in this space that a simple technological tool, automated, "structured" data feeds, could allow for "smart" regulation of banks to cut down on the abuses and fraud that led to the mortgage meltdown and continuing recession.
The latest debacle in that industry, rampant fraud in the foreclosure process,, gives even more urgency to such a reform, compounded by the recent resumption of foreclosures and news that the Justice Department is investigating possible criminal activity in the process.
Of course, all this comes at the same time as the political shift in Washington, requiring that any solution appeal to both sides of the aisle.
A system based on automated data could satisfy Republican demands to reduce regulatory burdens on business and government spending, with a pro-business bonus of giving banks a new tool to streamline their operations. At the same time, it would meet Democratic demands for a more straightforward mortgage process and consumer protection. In short, it offers a win-win solution that could be implemented relatively easily and at low cost. It would also provide a model for extending such a system throughout the nation's private sector and government: the more companies and government agencies that switched to the automatic data feed approach, the more exponential the benefits would grow.
Under such a system, when someone began the mortgage application process, the data they enter would be "tagged." Similar to HTML tags for web page layouts, "tags" based on a global, free, open standard - the eXtensible Business Reporting Language (XBRL) -- would bracket the data. That would attach metadata (or "information about information"), to it, giving it context and meaning.
Sounds like technobabble. In reality, the system's pretty straightforward. For example, we have no idea what the date Jan. 1, 2011 by itself refers to. However, if it's bracketed by"tags,"
These tags would both give the data context and, equally important, let it flow instantly and seamlessly anywhere the same tags were placed. The metadata would remain linked to the data wherever it was used.
That would obviate the need for Mortgage Electronic Registration System (MERS), the scandal-ridden company the industry created to be a clearinghouse for mortgages, that was a critical factor in the Byzantine mortgage-backed securities industry. It would reduce the banks' processing costs. More important, it would - and should - create transparency so regulators, the media, investors and, oh yeah, home owners, could find out, on a real-time basis, a loan's status.
How big a potential impact could such a system have on the mortgage industry? One XBRL expert, Bryant University Prof. Saeed Roohani, says that if it been in place in around 2004, "there would have been little room for mystery about types of portfolios and derived financial instruments that recently failed institutions were holding. Alarms would have been sounded long before reaching a crisis; the government and stockholders could have taken preventive action." In other words, our entire current economic mess might have been avoided!
This is no pipe dream: the governments of the Netherlands and Australia already require companies to file their government reports using the so-called "Standard Business Reporting" system based on XBRL.
Equally important, Rep. Darryl Issa, who will chair the House Oversight Committee, is a strong advocate of XBRL-based reporting, and really understands its benefits.
Implementation would be relatively straightforward: banks already XBRL, albeit in a limited fashion. More than 8,000 US financial institutions already must file XBRL-tagged reports to the Federal Deposit Insurance Corporation (FDIC). XBRL US, the group that oversees creation of specific XBRL tags for the US, has already developed a single data standard for residential mortgage-backed securities. FDIC Chair Sheila Bair could team up with Elizabeth Warren as she creates the new federal Consumer Financial Protection Bureau to push for such a change.
The time is right for this shift. Banks rank next-to-last among industries in terms of public confidence, their lowest rating ever, and risk much more punitive regulation as more scandals are unveiled. The ONLY way they will regain public confidence is not by feel-good ad campaigns, but by transparency and a "don't trust us, track us" attitude.
Because a seamless XBRL-based system would also allow them to manage their internal operations more efficiently, giving their entire workforce (for the first time) the real-time data they'd need to make better decisions and reduce inefficiency, it's time for banking industry leaders to join with legislators of both parties to create such a system. We've seen that fraud in the mortgage industry has the potential to destroy our economy. With a feasible, win-win alternative available, we can't afford to wait to switch to it.
W. David Stephenson, principal, Stephenson Strategies (Medfield, MA) is a consultant and theorist on strategic use of tagged data. He is writing Data Dynamite: unleash data to transform our world. Stephenson is also a senior consultant at the Gilbane Group (Cambridge, MA).
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