Regulatory Neglect and the Subprime Mortgage Crisis
Until a recent Washington Post op-ed piece, I was unaware that the federal government, in particular the Treasury Department’s Office of the Comptroller of the Currency, had put an end to state regulations that might have prevented many of the subprime mortgage abuses. (see below).
Bagley, Nicholas. 2008. “Crashing the Subprime Party: How the Feds Stopped the States From Averting the Lending Mess.” Slate (24 January). [op ed from the Washington Post]
“To combat this surge in predatory lending, several state legislatures decided to stanch the flow of easy credit to subprime lenders. In 2002, Georgia became the first state to tell players in the secondary mortgage market that they might be on the hook if they purchased loans deemed “predatory” under state law. This worked a dramatic change. Before, downstream owners of mortgage-backed securities might see the value of their investments drop, but that was generally the worst that could happen. Under the Georgia Fair Lending Act, however, players in the secondary mortgage market could face serious liability if they so much as touched a predatory loan. The AARP, which drafted the model legislation that formed the basis for the Georgia law, explained that imposing liability on downstream owners would “reduce significantly the amount of credit that is available to lenders who are not willing to ensure that the loans they finance are made in accordance with the law”.”That’s when the feds came in. Some of the biggest players in the secondary mortgage market are national banks, and the states’ efforts to curb predatory lending clashed with the banks’ fervent desire to keep the market in subprime loans rolling. And so the national banks turned to the Treasury Department’s Office of the Comptroller of the Currency. The OCC is a somewhat conflicted agency: While its primary regulatory responsibility is ensuring the safety and soundness of the national bank system, almost its entire budget comes from fees it imposes on the banks—meaning that its funding depends on keeping them happy. It was unsurprising, then, that the OCC leapt to attention when the national banks asked it to pre-empt the Georgia-like subprime laws on the grounds that they conflicted with federal banking law.