Fed highlights subprime issues

NEW YORK – The difficulties faced by the subprime mortgage market in the US may seem on the face of it to be a classic credit risk situation, but regulators are already beginning to sniff out operational risk issues as well. For example, Roger Cole, the director of the division of banking supervision and regulation at the Federal Reserve, highlighted a number of op risk issues in his late March testimony to the Committee on Banking, Housing and Urban Affairs of the US Senate. Specifically, Cole pointed out that the Fed has looked at such issues as quality control processes concerning third-party originations and residential lending appraisal practices to ensure appropriate collateral valuation processes, and "new product review processes to ensure that disciplined approaches are being brought to new lending products and programmes".

Other issues raised by the subprime mortgage scandal include alleged predatory lending by some firms; a failure to communicate clearly with customers; a failure to treat customers fairly; application and other types of mortgage fraud that went undetected; and a poor compliance culture at some firms.