The Mortgage Bankers Association plans to spearhead a year-2000 testing effort for lenders, servicers, and government agencies.

The problem, which involves computer code that mishandles references to dates after Dec. 31, 1999, could cause system meltdowns for many companies, experts believe.

The mortgage industry is particularly vulnerable because of its heavy use of dates in interest calculations, and because many companies have been slow to keep up technologically.

The MBA wants to forestall a domino effect in which companies that had not addressed the problem adequately corrupted the systems of those with which they exchange information.

"We want to help our members gain some level of comfort with their trading partners," said James Horn, director of technology initiatives at the MBA. "We decided to initiate discussions and work on creating an industrywide test."

Participants would include the Federal Home Loan Mortgage Corp., the Federal National Mortgage Association, the Department of Housing and Urban Development, and important private sector players such as Alltel Corp., Chase Manhattan Corp., Checkfree Corp., and Fiserv Inc.

The test project, which would begin in 1999, would examine how a participant's systems handle exchanges of information on credit scoring, loan insurance, loan underwriting, and loan servicing.

It would establish a data base that participants could use to measure their performance. The data base could point to areas where the industry needs to focus its attention.

Further, the data base could help alleviate the burden of cross-testing between individual mortgage businesses.

"I think the industry is waking up and realizing that it is far too expensive to try and deal with this one-on-one," said James Cotton, vice president of year-2000 compliance at Freddie Mac.

"One of most the insidious problems with year-2000 is you may get your reports and systems to run, but they may not run correctly."

He said the systemic risks to the industry are real and must be dealt with promptly.

Lauren Meadows, a vice president at Alltel and chairwoman of the MBA's testing committee work group, said the effort follows in the footsteps of the securities industry.

She said the mortgage industry has taken Wall Street's cue by narrowing its testing to keep it manageable. The MBA tests would be in four main categories: originations, secondary markets, loan servicing, and cash flows from borrowers to investors in the secondary markets.

Citing some potential problems for her company, which is the dominant servicer, Ms. Meadows said year-2000 problems could cause Alltel to ship incorrect delinquent notices to borrowers. Or the company could receive corrupt data from one of its partners and ship it out to another, oblivious of the havoc it could wreak.

"At Alltel, internally, I know my systems are working correctly," Ms. Meadows said. But,"when I pass data on to Fannie or Freddie, are they going to read it right? Is that transaction occurring correctly?"

Robert Buttacavoli, president and chief executive officer of RCG Information Technology, an Edison, N.J.-based consulting company, said the challenge is so big that the mortgage industry will not avoid trouble altogether.

"All the players in the supply chain have to be ready at the same time to do this orchestrated test," he said. "You have a set of management issues that are extraordinary."

But the testing should help mitigate losses. The framework for industry testing is expected to be in place by April.

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