a peek at db culture

From: Warren Reports via TPM Café

Caught Lying to Zippy

By Shonu Gandhi - April 3, 2008, 1:31AM

Since the beginning of the sub-prime crisis, anti-predatory lending advocates have pointed to how the egregious behavior of lenders and mortgage brokers have contributed to the crisis; their arguments recently found yet another anchor of evidence in the recently surfaced memo from JP Morgan Chase entitled “Zippy Cheats & Tricks.”

The nation's second-largest bank, Chase originates mortgage loans in addition to operating as an underwriter and funder of loans brought to them by a network of mortgage brokers. The memo instructs brokers on how to get their loans approved by Zippy, the bank’s automated loan underwriting system, explicitly suggesting that brokers inflate borrowers’ income or otherwise falsify loan applications.

While it’s easy to imagine various mortgage brokers scattered throughout the country engaging in the fraudulent practices that resulted in the crisis, it may be harder for many to imagine an FDIC-insured bank sanctioning those same practices. But it happened and though it hasn’t received much news coverage, federal legislators should keep the Chase memo at the forefront of their minds as they craft legislation aimed at protecting the nation from a repeat of the current fiasco.

The bank says that although the memo bears a Chase corporate logo and was emailed from Chase, it does not reflect the bank’s corporate policy. The Oregonian, reporting on the issue, commented:

“Even if the memo was penned by a single employee, it illustrates an attitude prevalent in certain corners of the mortgage industry during the boom years. In the face of sustained and significant home price increases, much of the industry veered away from traditional notions of safe and sound lending. Loan volume became as important as loan quality, particularly for the rank and file typically paid on commission.”

After being forced to write down $1.3 billion in nonperforming mortgages at the end of 2007, Chase no longer makes the stated income loans (also known as no document loans and liar loans) to which the memo was referring. But while Chase waited for this inevitable lesson, thousands of families were induced to take bad mortgages and the taxpayer funded FDIC was tricked in to insuring a bank making consistently bad loans.

The existence of the memo is a powerful reminder of what many advocates have been saying for years: we need regulation that anticipates that even the nation’s largest and most respected lending institutions are all too capable of systematically manipulating their customers and lying to the federal government, which not only insures them, but is certain to bail them out when times get tough. They face unchanging and powerful incentives to be profitable; they need equally powerful incentives to be honest and ethical.