FIGHTING FIRE WITH FIRE: TECHNOLOGY AS ANTIDOTE TO EXCESSIVE SUBPRIME LENDING

On fire during the last seven years, the business of subprime lending to American consumers this year has become a house on fire. More than 80 major U.S. lenders have gone bankrupt or exited the wholesale mortgage banking business. As with so many major developments in the financial services industry, technology has played an important role in the creation of the subprime lending debacle. So far, suggested solutions have been largely limited to legislative or financial restructuring initiatives. This column explores whether technology can be as important a part of the solution to the subprime problem as it was to the problem's creation. The current difficulties of the subprime lending business reveal the propensity of participants in the technology-based financial services economy to underestimate the risks that accompany breakthroughs in the way business is conducted. Certainly, the proliferation of automated underwriting software programs made the explosive growth of subprime lending possible. Too, the relatively low cost of such software served as a great equalizer between new market entrants and established companies. The recent arc of the subprime lending industry reveals that the social and economic benefits of new technology are more ambiguous than experts suggest. What matters is not the ability to speed the delivery of products to consumers through technology. What matters is being committed to meeting each customer's current needs in a way that prizes long term mutually beneficial relationships over immediate economic gain or advantage. Technology has certainly been at the root of the current subprime lending crisis. Solving the crisis will require dispassionate development of strategies that serve consumers, financial services providers and the nation at large equally well.