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FOR IMMEDIATE RELEASE
November 18, 2009
Contact: Robert M. Garsson
Comptroller Dugan Urges Regulators Around the World To Set Minimum Mortgage Underwriting Standards
TOKYO — Comptroller of the Currency John C. Dugan said today that regulators around the world should address the problem that sparked the financial crisis of the past two years by establishing minimum underwriting standards for all mortgages made in their respective countries.
These standards "would be the true minimums that we believe must be observed to keep lenders from risking too much loss to both themselves and their customers," he said in a speech to a seminar on international banking and finance sponsored by the Japan Financial News Company. "These standards would not dictate every underwriting feature of a mortgage product; instead, they would focus on core practices of sound underwriting on which there is the broadest consensus."
The Comptroller added that these standards should not be the same everywhere in the world.
"Each country has its own unique credit culture and different approaches to mortgage financing, and what works well in one might not work well in another," Mr. Dugan said. "What I am suggesting, though, is that each country should articulate what those standards are for their lenders, and should report periodically on how well those standards are working."
In the United States, for example, at least three underwriting standards should be mandated:
"We also should generally prohibit the lowering of monthly payments through so-called 'negative amortization' mortgages, which have performed terribly," Mr. Dugan added. "These mortgages lowered initial monthly payments by allowing borrowers not to pay the full amount of interest due, with the unpaid interest added to the principal balance of the loan. Borrowers should not be allowed to dig deeper into debt with each monthly payment."
In addition, Mr. Dugan said it is critical that any new mortgage regulations apply to all providers in order to prevent the kind of competitive inequity and pressure on regulated lenders that eroded safe and sound lending practices in the past.
The Comptroller said that with house prices sharply increasing in recent months in some countries, this is a good time to address mortgage underwriting. The Joint Forum, an international regulatory group that he chairs, has been asked to provide recommendations to the Financial Stability Board to address differences and gaps in the regulation of financial services around the world. One set of recommendations under consideration involves minimum mortgage underwriting practices, he added.
Mr. Dugan said he is normally much more comfortable with markets establishing the terms for credit extension by willing lenders to willing borrowers, with supervisors focusing on lenders’ ability to manage the credit risks they assume, and on lenders’ compliance with consumer protection laws.
"But sometimes, when underwriting standards get so out of balance that they cause widespread damage to borrowers and lenders alike, it becomes necessary for regulators to act more prescriptively," Comptroller Dugan added. "If ever there was a demonstrated need for such intervention, the searing U.S. mortgage market experience of the last several years fits the bill."
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