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Comptroller Dugan: Poor credit underwriting key to financial crisis

Dugan: Poor Credit Underwriting Was Key Factor in Financial Crisis

Comptroller of the Currency John Dugan testified yesterday before the Financial Crisis Inquiry Commission (FCIC) that poor credit underwriting, particularly by nonbank lenders that received little or no regulation, was a key factor in the financial crisis. The FCIC is a bipartisan 10-member committee the mission of which is recording what led to the financial and economic meltdown in the fall of 2008.  

“I believe there was a . . . fundamental problem: poor underwriting practices that made credit too easy. Among the worst of these practices were the failure to verify borrower representations about income and financial assets; the failure to require meaningful borrower equity in homes in the form of real down payments; the offering of 'payment option' loans where borrowers actually increased the amount of their principal owed with each monthly payment; and the explicit or implicit reliance on future house price appreciation as the primary source of loan repayment, either through refinancing or sale,” Dugan testified.  
All we can say is, “Amen.” Since the bankruptcy of Lehman Brothers – the signal event that brought the financial crisis into focus – the Oklahoma Bankers Association has been at the forefront of explaining how the collapse came about, that traditional banks are being falsely blamed for it, and reassuring Oklahomans that “Nothing's Safer Than Money In The Bank!”
Dugan went on to suggest that minimum underwriting standards should be established that would apply to all mortgage lenders:

“I believe the government should establish minimum, common-sense underwriting standards for mortgages that can be effectively applied and enforced for all mortgage lenders . . .,” he said. “If we had had such basic, across-the-board rules in place 10 years ago on income verification, down payments, and teaser rate mortgages, I believe the financial crisis would have been much less severe than it was.”
Click here to read his entire testimony (which is very long and detailed).

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