Underwriting Errors Outlawed
By Arnold Kling
The thrust of the mortgage section would require lenders to make sure that borrowers can repay any home loans they are sold. It puts limits on the ability of lenders to offer loans without documentation from borrowers, and has rules regarding the way loans can be refinanced.
Making a loan that subsequently defaults is known as a Type I error. Turning down a loan that will subsequently be repaid is a Type II error. In the past, the Congressional harpies have gone nuts over type II errors, accusing lenders of denying loans to minority borrowers and ruining the American dream. Now, they are going nuts about Type I errors. I would love to pass a law saying that mortgage underwriters will no longer make any mistakes, but that is like passing a law saying that heavy objects dropped from ten-story windows will no longer head toward earth.