A very thought-provoking ‘Good until Reached For’ post over on Gunnar Peterson’s site this week. Gunnar is tying together a number of recent blog threads to exemplify through the current financial crisis of how security and risk management best practices were not applied. There are many angles to this post, and Gunnar is covering a lot of ground, but the concept that really resonated with me is automation of process without verification.

From a personal angle, having a wife who is a real estate broker and many friends in the mortgage and lending industries, I have been hearing quiet complaints for several years now that buyers were not meeting the traditional criteria. People with $40k a year in household income were buying half million dollar homes. A lot of this was attributed to having the entire loan approval process being automated in order to keep up with market demands. Banks were automating the verification process to improve throughput and turnaround because there was demand for home loans. Mortgage brokers steered their clients to banks that were known to have the fastest turnaround, and mostly that was because those were the institutions that were not closely scrutinizing loans. This pushed more banks to further streamline and cutting corners for faster turnaround in order to be competitive; the business was to originate the loans as that is how they made money.

The other angle that was quite common was many mortgage brokers had further learned to ‘game the system’ to get questionable loans through. For example, if a lender was known to have a much higher approval rating for college graduates than non-college graduates given equal FICO scores, the mortgage brokers would state the buyer had a college degree knowing full well that no one was checking the details. Verification of ‘Stated Income’ was minimal and thus often fudged. Property appraisers were often pushed to come up with valuations that were not in line with reality as banks were not independently managing this portion of the verification process. When it came right down to it the data was simply not trustworthy.

The quote of the Ian Grigg about is interesting as well. I wonder if the comments are ‘tongue in cheek’ as I am not sure that it killed the core skill, rather automation detached personal supervision in some cases, and others overwhelmed the individuals responsible because they could not be competitive and perform the necessary checks. As with software development, if it comes down to adding new features or being secure, new features almost always win. With competitions between banks to make money in this GLBA  fueled land grab, good practices were thrown out the door as they are an impediment to revenue. If you look at the loan process and the various checkpoints and verifications that occur along the way, it is very similar in nature to the goal with Sarbanes-Oxley in verification of accounting practices within IT. But rather than protecting investors from accounting oversight, these controls are in place to protect the banks from risk. To bypass these controls is very disconcerting as these banks understand better than anyone financial history and risk exposure.

I think that capture the gist of much of why sanity checks in the process are so important; to make sure we are not fundamentally missing the point of the effort and destroying all the safeguards for security and risk going in. And more and more, we will see business processes automated for efficiency and timeliness, however, software not only needs to meet the functional specifications but risk specifications as well. Ultimately this is why I believe that securing business processes is an inside out game. Rather and rather than bolt security and integrity onto the infrastructure, checks and balances need to be built into the software. This concept is not all that far from what we do today with unit testing and building in debugging capabilities into software, but needs to encompass audit and risk safeguards as well. Gunnar’s point of ‘Design For Failure’ really hits home when viewed in context of the current crisis.