On January 7, 2004, the federal Office of the Comptroller of the Currency quietly staged a coup against the U.S. states. The move poked a gaping hole in the laws shielding consumers from predatory banking practices, and also coincided with a historic boom in subprime lending. Now we're paying the price.
On paper, the OCC regulates the country's national banks. And it doesn't like to share. Five years ago, the agency passed rules allowing it to preempt state laws governing these institutions. That authority applies even if no federal statue exists protecting consumers from unfair financial practices.
Big banks lobbied hard for federal preemption because state laws are typically more stringent. By contrast, many legal experts said at the time that the new rules improperly overturned years of legal precedent. Consumer advocates also predicted that the regulatory shift would lead to lending abuses.
New evidence suggests that's exactly what happened. In a new report, the U. of North Carolina's Center for Community Capital concludes that borrowers in neighborhoods in states with anti-predatory lending, or APL, laws are less likely to fall behind and default on their mortgages than consumers in states where no such statues exist [Note that the report was underwritten by The National State Attorneys General Program at Columbia Law School and the Consumer Protection Fund of the North Carolina Department of Justice.]
APL protections might include restrictions on loan terms, requirements on lenders to consider borrowers' ability to repay and caps on balloon payments. As of June 2008, foreclosure rates in states with APL laws were at 1.36 percent, compared with 1.52 percent in non-APL states. It also takes longer to foreclose on a home in an APL state, at an average of 309 days, than in states without the protections, at 282 days. Say the researchers:
With few exceptions, the results support our expectations that a substantial state APL is associated with lower mortgage risks.The OCC's power grab punctuated a period of intense deregulation in financial services. Another banking regulator, the Office of Thrift Supervision, in 1996 had elbowed state regulators aside in asserting primary oversight for federal thrifts. The era also saw the abolition of Glass-Steagall, a Depression-era law that separated commercial and investment banking.
Preemption fundamentally changed banking, and in particular the mortgage lending. Most important, national banks were less regulated. That freed them to loosen their lending standards. It also tilted the playing field against state banks, which remained subject to generally tighter local regulations. For the OCC, however, preemption was good for business. Writing in 2004, George Washington University law professor Arthur Wilmarth Jr. said that
. . . . the OCC evidently concluded that an aggressive preemption campaign -- promising freedom from state regulation -- is a "significant benefit" and "major advantage" that will persuade large, multi-state banks to operate under national charters.In a landmark decision, the U.S. Supreme Court earlier this year ruled that the agency had overstepped its authority in narrowing the role of the states in supervising financial institutions. But that hasn't stopped OCC chief John Dugan from defending preemption. Indeed, he is challenging a plan by the Treasury Department, of which the OCC is part, to return a measure of power to state banking officials. Said Dugan last month in commenting on the proposal:
In particular, for the first time in the 146-year history of the national banking system, federally chartered banks would be subject to multiple state operating standards. . . . This rejection and reversal of such standards is an extreme change that is, in my view, both unwise and unjustified.Unwise for whom? Not consumers, judging from the predatory lending report. The OCC is notorious for its lax regulation, with even Treasury having publicly rebuked the agency. And while the preemption rules were adopted under a previous Comptroller, Dugan has carried on the tradition of putting the OCC's institutional interests ahead of its public duty.
When it comes to protecting consumers, it's time to bring the states back into the equation.