Actually the Federal Banking [and State] Regulatory agencies would strongly disagree with that logic. Regulations have been in place since 1929 and further strengthened after the Savings and Loan failures that put responsibility on the banks to insure that the borrowers had the required assets/income/credit history to validate the integrity of the loans.
Imagine hearing from your broker, "I just can't loan you the money because you don't qualify."
At one time in recent history bank auditors would make surprise visits to banks, mortgage companies, loan companies, pull a random selection of loans, their supporting documents and verify their integrity. Irregularities would bring a nightmare of bank regulators to comb through EVERY loan to determine pattern.
It is that recent lack of Banking Regulators from the Department of Commerce and SEC [just let the industry police itself] that has assisted in this mess.
Of course we have recently replicated the same Stirling set of principles within the Mining industry [just let the industry police itself] and have watched miners be pulled out of holes in the ground in bodybags because of that lack of regulation and inspection by the MSHA.
You are so eager to argue with me, you make my point. The regulatory process you describe above only covers the integrity of one side of the loan transaction--the underwriting. The purpose being to prove that the loan was granted with terms and conditions that comply with Federal law regarding civil rights, redlining, ratios, etc. These folks are not interested in whether the loan was in the best interest of the borrower, which involves an entirely different set of standards.
Part of your problem here is that you've ignored the change-over to mostly conventional loans in recent times. They are not FHA and VA insured and therefore receive much less scrutiny. And the conventional loans are the ones mostly involved in the sub-prime issue.
I completely agree with lenders denying loans for non-qualifying borrowers; that was my point and I think it's yours, too. When the lender says, "At your age (or health, or multiple marriages, or too many college-age children) a new loan wouldn't be your best decision" , I object to them stepping over the line. The lender's concern should be only, 1) is the collateral solid, and 2) can the payments be made. That's it. No social work interviews necessary on the loan application.
Using the mining analogy is a weak side-trip and just grinds your liberal ax about government regulation.