Last week, Brian blogged here about Governor Spitzer's claim that the Bush administration contributed to the mortgage crisis by preempting state attempts to bar predatory lending. Comptroller of the Currency John C. Dugan responded by issuing the following statement last Thursday:
Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem. Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.
However, comments from today assert that the OCC and national bank preemption have prevented the states from taking action against predatory or abusive lenders. That’s just plain wrong.
The OCC extensively regulates the activities of national banks, including mortgage lending. The OCC established strong protections against predatory lending practices years ago, and has applied those standards through examinations of every national bank. As a result, predatory mortgage lenders have avoided national banks like the plague. The abuses consumers have complained about most — such as loan flipping and equity stripping — are not tolerated in the national banking system. And the looser lending practices of the subprime market simply have not gravitated to national banks: They originated just 10% of subprime loans in 2006, when underwriting standards were weakest, and delinquency rates on those loans are well below the national average.
Nothing the OCC has done has prevented the states from regulating and preventing abuses among the lenders that they license – lenders that are the source of most of today’s problems. The states have ample authority – as well as clear responsibility – to set standards for these lenders and enforce them. It defies logic to argue that preemption was an impediment. National banks are bound to obey the strict standards enforced by the OCC everywhere they operate – even in states that had far less rigorous standards. The states should have applied equally rigorous standards to the non-bank lenders that were responsible for the bulk of the problems.
I'm not sure who Comptroller Dugan means when he refers to "[a]lmost everyone who has paid attention to the subprime lending crisis" since he doesn't cite any sources (not that one would necessarily expect that in a statement of this sort). Here, by the way, is an excerpt from our casebook, written before the subprime crisis burst, that cites some relevant sources, though they cover an earlier time period than the one Comptroller Dugan is referring to:
One critic claims that national bank operating subsidiaries originated nearly a quarter of total subprime loans in 2003. See Baher Azmy, Squaring the Predatory Lending Circle: A Case for States as Laboratories of Experimentation, 57 Fla. L. Rev. 295, 359 (2005). See also Arthur E. Wilmarth, Jr., The OCC’s Preemption Rules Exceed the Agency’s Authority and Present a Serious Threat to the Dual Banking System and Consumer Protection, 23 Ann. Rev. Banking & Fin. L. 225, 314-15 (2004) (“most of the largest subprime mortgage lenders are nonbank affiliates of major bank holding companies. . . . a number of [national bank subsidiaries] have produced serious allegations of abusive lending practices.”). Preemption of state law as to nonbank subsidiaries is particularly significant because such subsidiaries are not routinely examined by federal regulators. GAO Report at 49, 51-53
In a new presentation entitled Update on U.S. RMBS, Performance, Expectations, Criteria, Fitch Ratings now projects that 50% of the subprime mortgages from the fourth quarter of 2006 in rated securitizations will end in foreclosure. They also project loss severity of 60%, meaning that investors will recover only 40% of the principal and interest due on the mortgages after foreclosure, resulting in losses of 30%. These numbers are astounding. Fitch makes similar predictions for the other 2006 and 2007 "vintages" of subprime mortgages. Given total subprime mortgage originations for the two years of almost $1 trillion, a loss rate of 30% would represent $300 billion. As Senator Dirksen once said, "a billion here, a billion there. . . ."
