Dugan: Risk-Retention Moves May Backfire
Sloan, Steven, American Banker
Byline: Steven Sloan
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. …