Bailout

John Dugan, protector of predators

By Felix Salmon

In the wake of Andrew Martin’s searing profile of him last week, the last thing John Dugan needed was to be quoted in the American Banker looking like even more of a banking-industry shill. Yet here’s the quote he gave Cheyenne Hopkins for her (sadly firewalled) article on whether safety and soundness conflicts with consumer protection:

“One area that stands out is loan underwriting,” Dugan said in an e-mail. “For example, a consumer agency might think that down payments on house purchases should be limited to 5% to promote homeownership, while a safety and soundness regulator might believe a higher minimum could be needed to ensure lenders don’t make loans that won’t be repaid.

Given the significant role that loose underwriting played in the financial crisis, I think it makes sense to provide an exemption from the consumer agency’s jurisdiction for credit standards.”

Why on earth would a consumer protection agency ever limit down payments on house purchases? Does Dugan think that the government is going to step in and forcibly prevent people from paying cash for a property? Is he so confused about what consumer protection entails that he thinks it would involve setting minimum — as opposed to maximum — amounts of leverage? Has he already forgotten so much of the crisis that he thinks that homeownership is likely to be considered something unequivocally good for consumers, as opposed to the largest financial risk that most consumers will ever take?

The fact is of course that loose underwriting is as bad if not worse for consumers as it is for banks, and no consumer financial protection agency is going to condone it. After all, if banks lose money on bad underwriting, that’s because their consumers can’t pay back their loans — and if they can’t pay back their loans, that means they’re in bad financial shape. You don’t protect consumers by encouraging them to get into bad financial shape. This is not rocket science.

Yet Dugan wants to prevent the consumer protection agency from looking at credit standards! The reason of course has nothing to do with worries that the agency will force the banks to loosen up on underwriting, and everything to do with worries that it will prevent predatory lending and loan pricing based not on the likelihood of repayment but rather on how much money can be squeezed out of the borrower.

Honorable banks who want to profit from their customers’ financial well-being have nothing to worry from a consumer protection agency. Dishonorable financial institutions who want to squeeze their customers dry before moving on to the next sucker do have something to worry about. And its those institutions that Dugan is trying to protect. For shame.

Update: Many thanks to American Banker, which has now taken down its firewall for this story. So go read it!

Full post as published by Macroprudential on March 30, 2010 (boomark / email).