Tuesday, October 9, 2007

Comptroller Dugan Urges Improved Underwriting Standards on Third Party Loans

News Release from the Comptroller of the Currency: Comptroller of the Currency John C. Dugan said today that banks need to strengthen their underwriting standards, particularly on loans sold to third party investors.

I am here to say that bank underwriting standards for these products, in many cases, moved too far away from what they would have been if the bank had held those loans on its own books,” Mr. Dugan said in a speech to the American Bankers Association’s Annual Convention.

Mr. Dugan noted the many positive aspects of the “originate-to distribute” model, but said there can be negative effects on underwriting standards, including relaxing significantly the incentives to use caution and prudence in underwriting loans sold to third parties.

“When a bank makes a loan that it plans to hold, the fundamental standard it uses to underwrite the loan is that most basic of credit standards that I’ve already talked about: the underwriting must be strong enough to create a reasonable expectation that the loan will be repaid,” the Comptroller said. “But when a bank makes a loan that it plans to sell, then the credit evaluation shifts in an important way: the underwriting must be strong enough to create a reasonable expectation that the loan can be sold—or put another way, the bank will underwrite to whatever standard the market will bear.”

Comptroller Dugan outlined what needs to be done. “I am here to say that banks need to strengthen their underwriting standards so that they move back towards the fundamental principle of maintaining a reasonable expectation that loans will be repaid, even if the loans are to be sold to third parties – and that goes for mortgage loans, leveraged loans, or any other syndicated credit,” Mr. Dugan said. read more >>


Anonymous said...

I completely agree with Dugan. These CEOs at these institutions have a responsibility to community, country, and shareholders. Yes, that may sound a bit strange the first two, but it is entirely accurate. Remember if these institutions lack underwriting standards and push the loan off its books, then at the end someone will hold the bag. Will it be the taxpayer, shareholder, or both that hold the bag at the end? yes, to many people in this world forget about their duty to underwrite these assets with prudence and now the whole financial system must suffer as a result. and the jerks that got rich quick are laughing all the way to the bank, which with the dollar falling it is probably a Canadian bank at that...

Michael Blomquist said...

Why is Duggan still in office? This mortgage madness occurred during his watch! Duggan, Bair and Reich should be removed from office immediately!

Mozillo, et. al. should be disgorged from all illegal profits/income of the past 3 years and sentenced for their crimes.

If our elected representatives will not act in our best interest we need to begin impeachment proceedings.

This has been the darkest 4 years of capitalism in its relatively short existence.


help convict banking criminals and corrupt politicians.

Houseflow.com said...

Its about time. I must say it seems like just about anybody was able to buy a home. I mean some people just shouldnt be buying a home. Its about time.