WASHINGTON — Calling proposals that would require lenders to retain a portion of the loans they securitize "imprecise" and "indirect," Comptroller of the Currency John Dugan said Tuesday that policymakers should focus on tougher underwriting standards.
"Instead of going at the underwriting problem indirectly through 'skin in the game' requirements, why not attack it directly?" he asked during a speech to the American Securitization Forum. "If quality underwriting is the goal, then why not … establish minimum underwriting standards directly by regulation, at least for residential mortgages? Why not apply these standards to all mortgages, whether retained or securitized, so that there is an entirely level playing field?"
Dugan's argument stood in contrast to provisions of a bill passed by the House in December that would require banks to retain 5% of the loans they securitize.
The idea, which is mirrored in proposed Senate legislation, is aimed at preventing banks from making bad loans and then avoiding any risk by selling them to investors.
In an interview after the speech, Dugan said he has been "surprised all along why this part of the problem hasn't attracted more attention."
He does not oppose the idea of requiring banks to retain some of the risk associated with their loans, but in light of recent accounting changes adopted by the Financial Accounting Standards Board, Dugan said, he worries that the proposal could shut down the securitization market, which is vital to financial markets.
"I don't oppose skin in the game as a concept, but it's going to cause more problems than it solves because of the accounting," he said in the interview.
Last summer, FASB issued rules requiring banks to bring most securitizations that were previously held off their books onto their balance sheets. The change could add billions to the balance sheets of many large banks while also increasing their capital charge. The banking and thrift regulators agreed last month to let financial institutions phase in their compliance with this FASB rule over four quarters.
Speaking to the securitization group, Dugan named at least four areas where regulators could mandate minimum underwriting standards: income verification, down payments, debt-to-income ratios and qualifying borrowers based on higher rates if their monthly payments will eventually grow.
In the interview, Dugan said it would be best for the standards to be issued as rules and expressed confidence that regulators — who often approach interagency rulemaking from different perspectives — could find common ground.
"I don't think it would be hard for regulators to sit down and agree on a standard for income verification," he said. "Yes, we have fights and issues, but for the most part we work out our differences."