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triggered concerns at Peoples over increased risks of default or
delinquency, Peoples did not raise its interest rates.
c. Loan Underwriting and Documentation
Loan decisions were made by a four-person loan committee on
the basis of a loan application. Peoples' underwriting
procedures were criticized by the FDIC for a number of
shortcomings. Until early 1993, for example, Peoples did not
require credit reports or title insurance for residential
mortgage loans and did not check whether flood insurance was
required on the property being financed.10 Contrary to standard
industry practice, Peoples made loans without verifying the
market value of the underlying collateral through independent
appraisal. Instead, Peoples used less reliable in-house
appraisals that did not conform to the format used by independent
appraisers. In some cases, Peoples even recycled old appraisals
of a property, rather than obtaining a new appraisal that would
reflect current market values.
Unlike most mortgage lenders, Peoples did not sell any
mortgage loans in the secondary mortgage market. Peoples had
unsuccessfully tried to sell mortgage loans in the past to Fannie
Mae and Freddie Mac but did not have underwriting practices and
documentation sufficient to comply with the standards of the
10 There was a high likelihood of flooding in some areas
served by Peoples; the Ohio River is the southern boundary
of Warrick County.
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