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Regulators Lip Service On Loan Standards Goes Unheeded: Now Its Hammer Time

Federal regulators have been warning lenders for months about home mortgage underwriting standards but little has changed [American Banker] [1] According to a survey by the Federal Reserve, only 5 in 60 banks have made changes. This seems out of step with the tone of the guidance on home equity lending, AGENCIES ISSUE CREDIT-RISK MANAGEMENT GUIDANCE FOR HOME-EQUITY LENDING [pdf pg. 7], which was issued by the Fed, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration.

By most accounts, fierce competition, coupled with banks’ general comfort with the practices, has kept the industry from changing its product offerings or lending criteria much.

“Regulators said in the guidance that, along with rising interest rates, there were several other issues that warrant extra caution: interest-only features; loosening documentation standards; weaker loan-to-value ratios, debt-to-income ratios, and credit scores; and the increased use of brokers and automated appraisals…Agency heads’ speeches have grown more ominous, and bank executives report a recent uptick in questions from examiners and written warnings of coming scrutiny.

However, regulators say they are making progress and are concerned about moving too quickly for fear of causing a credit crunch, but are concerned about unsafe lending practices.”

Web Master’s Note: As a matter of record, there is no real wall between the sales function and the underwriting function of many, if not most national lenders. In other words, the structure of lenders today is flawed related to matters of collateral assessment. Perhaps this movement by regulators is the proverbial “light at the end of the tunnel.” There is still hope that good appraisers will be able to continue working whether or not they “play ball.”