Point of View: FICO Test a Flaw in Plan.(Fico Score Credit Rating)

The viewpoint is an excerpt from Congressman Franks opening remarks at a recent committee hearing on the subprime lending crisis. During the hearing, Congressman Frank commented on the administrations plan to aid troubled nonprime borrowers who are facing upward adjustments to their mortgage payment. The remarks came on the heels of the release of the Bush Administrations proposal.

I do then want to make two points today. One is a general point and whats been striking about the subprime crisis is not just simply the subprime crisis but the extent to which it has spread to be the most significant financial problem in the world since it seems since the Asian financial crisis. And as I think about it, it does seem to me there is a problem intellectually and then ultimately politically that we in the executive branch, in the legislative branch, and in the private sector all working together have to solve and that is we need to find a substitute, and it is the substitute for and the bank regulators are here and I have always been told by bankers that the prime rule of banking was 'know your borrower.

And what has happened is that we have created through a whole group of new methods a situation in which you not only dont know your borrower, you have no idea who your borrowers borrowers were or are. The nexus between the borrower and the lender, I believe turns out to have been a more important safeguard than we thought and we have been trying very hard, the private sector has, and some of us in the regulatory field have been trying to find a substitute for the borrower-lender relationship and we have as it turns out have been less successful than we thought.

That is what risk management is. It is a substitute it seems to me for trying to know whether the person you lent the money to can pay you back. And what we need to do is to figure out in not just subprime but in general how to deal with that, and that will be the subject of further hearings.

How do you keep the benefits of this increased liquidity and find some way to preserve again what has been the great safeguard of not lending money to people who you didnt think can pay you back. When you dont have to worry about whether they pay you back, and when the people who now own the loans dont know whom in effect they lent it to ultimately, we have problems.

With regard to the proposal that the Administration has put forward, I welcome it, it is a recognition that the increase in the rates would cause serious problems and that some public sector concern with that is ...