Will states have the power to defend themselves against abusive bank policies? Or will a federal agency cozy with the nation’s largest banks prevent the states from doing anything? That’s the issue at the heart of an uncommonly public fight between two bank regulators with very different ideas about how best to protect consumers.
The issue came to a head this week when George W. Madison, top lawyer at the U.S. Treasury, sent a letter blasting the Office of the Comptroller of the Currency in response to its proposal to continue overruling state banking laws pretty much the same way it did before the subprime mortgage crisis.
In his unusually blunt letter, Madison criticized the OCC for ignoring the intent of Congress, which passed a law last summer specifically limiting the comptroller’s power to preempt state laws.
“The notion that the new standard does not have any effect runs afoul of basic canons of statutory construction; it is also contrary to the legislative history,” Madison wrote.
Regarding the office’s plan, an OCC spokesman had this to say: “The comment process is a very important part of every rulemaking, and we will be carefully reviewing all comments we’ve received as we move toward a final rule.”
This whole thing might seem arcane to many. But actually, the question of federal preemption gets to the heart of the ongoing mortgage crisis. Beginning in the late 1990s, states began to notice the devastation happening across many neighborhoods and cities caused by predatory lending and abusive subprime mortgage loans.
Many of these loans were designed to fail, says Kathleen Engel, a law professor at Suffolk University who was among the first academics to research the trend. Mortgage companies made the loans to reap the upfront fees, and they structured many of the loans to have increasing interest rates, forcing homeowners to refinance. Every time they refinanced, the mortgage companies received another round of fees, eventually stripping homes of all their equity and forcing the homeowners into foreclosure and eviction.
“They were unsustainable from the get-go,” Engel says.
Some states, including North Carolina and Ohio, saw what was happening and passed laws to ban predatory lending. But the Office of the Comptroller of the Currency used its power of preemption as the nation’s primary banking regulator to strike down those laws, without passing new rules of its own to stop the practice.
The comptroller’s decision was widely criticized by housing experts and consumer advocates. The ruling was “at best, misguided, and at worst, a blatant attempt to increase the power of the OCC at the expense of homeowners, the sovereignty of the states, and the intent of Congress,” according to a letter to the OCC signed by nine consumer advocate groups in 2003.
Unfortunately, the advocates were right. The subprime mortgage spree eventually caused a massive economic bubble and the recession that followed, according to the final report by the Congressional Financial Crisis Inquiry Commission.
[Related: Multiple Fronts in Mortgage Industry War]
In response to that crisis, Congress passed the Dodd-Frank financial reform package, which included language reining in the comptroller’s power to override state law, but giving the comptroller’s office the power to write the final rule. The OCC’s proposal tweaks the wording, but otherwise keeps its current preemption power to overrule any state law that may “obstruct, impair or condition” the banking industry.
That, according to the Treasury, is totally bogus.
“This avoidance of the specific standard is inconsistent with the plain language” of Dodd-Frank, Madison wrote.
The attorneys general of all 50 states also wrote a letter criticizing the OCC’s proposal, calling it a power grab that could lead to a repeat of the current recession.
“Protection of consumers is a traditional state duty and power,” the state officials wrote. “The OCC does not have authority to preempt general state laws.”