Wednesday, May 23, 2007

Comptroller Dugan: Concerned Over ‘Stated Income’ Subprime Loans

News Release from the Comptroller of the Currency: John C. Dugan said today he is increasingly troubled by the growing use of unverified “stated income” in subprime lending, and said he believes the federal agencies should address the practice in pending guidance.

“Sound underwriting – and, for that matter, simple common sense – suggests that a mortgage lender would almost always want to verify the income of a riskier subprime borrower to make sure that he or she had the means to make the required monthly payments,” Mr. Dugan said in a speech to Neighborhood Housing Services of New York.

“But the norm appears to be just the opposite: nearly 50 percent of all subprime loans last year accepted stated income,” he said.

“Apparently verified income is viewed as a critical factor in determining whether a loan can be saved, which of course begs the question: if loan verification is such an important predictor of the borrower’s ability to repay in the current environment, why wasn’t it equally important when the loan was first made?” Mr. Dugan asked.

But he said such uses of stated income lending should be the exception, rather than the rule, for three key reasons:
  • Stated income is too great a temptation for misrepresentation and, in its most extreme form, outright fraud.
  • The practice also undermines transparency: “How can lenders seriously talk about debt-to-income ratios, for example, if the denominator of ‘income’ is really an unknown variable that can be whatever the borrower says it is?” he asked.
  • It is not a safe and sound underwriting practice to make mortgage loans that substitute future house price appreciation for borrower income as a key source of repayment, as appears to have been the case in many subprime loans underwritten in the last few years.
Let's hope this message gets heard, well worth reading, the complete statement can be found here.

The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks. It also supervises the federal branches and agencies of foreign banks. Headquartered in Washington, D.C., the OCC has four district offices plus an office in London to supervise the international activities of national banks.


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