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Another Wall Street Bank Fairly Tale

By Joe Consumer

Once upon a time, Michigan regulators tried to oversee a Wachovia-owned mortgage business that had recently become a wholly-owned subsidiary of the nationally chartered bank, Wachovia.  In 2007, the U.S. Supreme Court said no, Michigan couldn?t do this.  With Justice Stevens dissenting, the Court decided that bank-owned mortgage lenders could not be subject to stronger state consumer protection laws.

Fast forward, oh, another year and wham ? here comes the subprime mortgage crisis, where banks had been lending hundreds of billions of dollars in home loans with terms that made them incredibly risky.  Many were predatory.  Some states had tried to pass anti-predatory lending laws that contained assignee liability provisions, which would have put the Wall Street banks on the hook for buying up these loans. However, states were aggressively fought by the Clinton Administration and later by the Bush-controlled Office of the Comptroller of the Currency (OCC), which insulated federally chartered banks from state anti-predatory laws as part of a larger Bush White House agenda to preempt state consumer protection laws.  (Check out the study from the Center for Justice & Democracy, Legal Abandon: How Limiting Lawsuits Led To The Financial Collapse And What To Do About It.)

Now let's fast forward to yesterday, when OCC regulators were grilled by the Financial Crisis Inquiry Commission over their complete and utter failure to prevent the crisis.  Market Watch reports:

Pre-emption of state laws against predatory lending was not a major cause of the financial crisis, according to testimony on Thursday by current and former federal bank regulators.

A congressional commission charged with investigating the roots of the crisis clashed with the bank regulators on Thursday. ?

"You tied the hands of the states and then you sat on your hands," said Phil Angelides, the chair of the Financial Crisis Inquiry Commission.

Not so, said John Dugan, head of the Office of the Comptroller of the Currency. "The weak lending standards [of the states] were not the result of pre-emption."

As the housing bubble inflated early in the last decade, the OCC fought efforts by states to enforce predatory lending laws, insisting that nationally chartered banks should be subject to national laws, not 50 separate state standards.

"There is a great value in being able to have a common set of standards that apply regardless of the state in which you operate," Dugan said.

Yeah, how?d that work out?  The UNC Center for Community Capital studied this and found that after OCC?s preemption of state anti-predatory lending laws, national banks swooped into those states and made riskier loans than the state banks were able to make since they remained constrained by state laws.  According to the Center for Responsible Lending, ?There was a lot of legal talent hired by the industry to try to figure out ways to make sure that nobody along the chain (including Wall Street) had to suffer legal accountability.?

And we end this delightful fairly tale by saying, ?And this was a story of how it happened. And that is how it is to this day.?  On the other hand, why taint the charming fairly tale genre with the likes of disingenuous bank regulators.  Gives them all a bad name!

THE END

Full post as published by ThePopTort on April 09, 2010 (boomark / email).