Consumer Law & Policy Blog

OCC's Response to Spitzer's Charge that the Bush Administration Worsened the Mortgage Crisis by Preempting State Laws

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

Senate Negotiators Appear to Agree on CPSC Reform Bill

This article from yesterday's Washington Post reports that Democratic Senators Mark Pryor and Daniel Inouye and Republican Senator Ted Stevens have agreed on legislation to reform the Consumer Product Safety Commission. The article says that the bill would, among other things, more than double the CPSC's budget over the next eight years. Other attributes of the bill are set out in the Post article. The Senate is expected to vote on the bill in early March. The House passed CPSC legislation last December, but, as the Post article notes, the House bill is not identical to the Senate bill.

New Study Shows Disproportionate Numbers of Payday Lenders in Bible Belt and Mormon West

by Christopher Peterson

A new study, conducted by Steven Graves and myself, finds a surprising relationship between populations of conservative Christian Americans and the proliferation of payday lenders. A draft of the study can be downloaded from SSRN, free of charge.

The natural hypothesis is to assume that given strenuous Biblical condemnation  of usury there would be more aggressive regulation and less demand for payday loans in these states, but ironically, the numbers show the opposite is true. 

The study is based on the largest and most comprehensive database of payday lender locations yet created. We developed an index that measures the density of payday lender locations based on the number of lenders within a geographic area, the number of payday lenders relative to population, and the number of payday lenders relative to bank branches. We also developed an index that measures the political power of conservative Christians within a state. This index has three components. First it is based on voting scores given to a state’s Congressional delegation by a panel of three leading Christian Faith based advocacy organizations including the Christian Coalition, the Family Research Council, and the Christian Action Network. Second, the Christian power index also included Congressional delegation scores compiled by Poole and Rosenthal, two widely respected political scientists that study these issues. And finally the index was also based on the percent of a state’s Evangelical or Mormon population. Our results are based on a simple correlation coefficient test comparing the payday lending density index to the Christian power index. Our hope was to create transparent results, that simply describe a commercial and spatial pattern of high cost lending that exists in our society.

One thing our data does not show is a causal relationship between faith and payday lending. For example, we believe there are many other variables that help explain why this pattern has emerged, in addition to faith. Nonetheless, our findings should serve as a wake up call to pastors, religious leaders, and people of faith that usurious lenders are thriving in their neighborhoods, communities, and states. Given the Bible’s injunction against usury, Christ’s example of expelling usurious money changers, and the ancient Christian tradition of sound financial stewardship, our study suggests that Christian Americans may want to pressure their political leaders to better effectuate Biblical values on consumer finance.

We believe it is sad that states with a pious and honorable religious heritage now disproportionately host predatory lenders.

Eliot Spitzer: Bush Administration Stymied States In Efforts to Stop Predatory Lending Crisis

by Brian Wolfman

Check out this op-ed by Eliot Spitzer in today's Washington Post. The N.Y. Governor and former N.Y. attorney general argues that the Bush Administration, by insisting that federal law preempted the states' efforts to curb predatory lending, created and perpetuated the mortgage crisis. Spitzer explains that the states enacted laws and filed suits to try to curb predatory practices because they saw the current crisis looming. Sptizer explains the federal government's role:

"What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no."

"Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye."

Credit Card Practices Bill Introduced in House of Representatives

Thanks to Ed Mierzwinski over at U.S. PIRG's Consumer Blog for this excellent post on the introduction last Thursday of the Credit Cardholders Bill of Rights Act, H.R. 5244. The bill addresses a number of credit card company practices, including imposition of certain interest rate and fee hikes and charging interest on already-paid-off balances. Ed's post has a number of useful links about the bill. The text of the legislation is here.

Consumer Groups Sue Justice Department Over Auto Database

by Deepak Gupta

1992, Congress required the federal government to set up a comprehensive national database covering the title-, theft-, and damage- history of used cars, based on data from insurance companies, junk and salvage yards, and all 50 states.  A consumer thinking about buying a used car would be able to instantly check the validity of the car's title and odometer reading and learn whether it had been stolen or severely damaged in the past.  Making that kind of information widely available would dramatically reduce the amount of auto fraud and save consumers from economic loss and physical injury.

But more than fifteen years since Congress first required the federal government to implement the database, the government still hasn't done it!

Yesterday, we filed a lawsuit against the U.S. Department of Justice, asking the federal district court in San Francisco to force the government to do what Congress required it to do. Public Citizen was joined in the suit by two other national consumer groups -- Consumers for Auto Reliability and Safety (CARS) and Consumer Action. You can read our complaint here and find additional information about the case here, here, and here.

Here's what Senator Chuck Schumer (D-NY), the lead sponsor of the original 1992 legislation, said in a statement released yesterday:

"We all know that you can't always judge a book by its cover and the same is true with many used cars that end up at junk and salvage yards. Consumers deserve to know the true origin and condition of the vehicles they are purchasing, including whether that car was once stolen.

It is simple: for sixteen years, the Department of Justice and junk yards have been eschewing their responsibility to consumers, law enforcement, and the public by ignoring their mandate to routinely file the required reports. It is about time that all parties were forced to comply with what I believe is a common sense measure to fight auto theft and to protect the public from fraud. I am encouraged by Public Citizen's efforts on this case, and I hope that this important law will finally be enforced as it should have been from day one."

How the candidates stand on the subprime meltdown

by Sam Glover

Bankrate.com highlights the major-party presidential candidates' stances on the subprime meltdown. Romney, Huckabee, and McCain favor a light touch, perhaps freezing interest rates or offering some aid to borrowers. But they are vague as to what, if anything, they would do. Paul favors a return the gold standard and the abolition of the Federal Reserve.

Democrats Clinton and Obama, by contrast, each have a plan to address the problem and prevent a recurrence.

Clinton's four-point plan is to (1) crack down on unscrupulous mortgage brokers; (2) crack down on mortgage lending abuses; (3) help reduce foreclosures; and (4) expand affordable housing.

Obama's also has four points to his approach, and would (1) combat mortgage fraud and subprime loans; (2) mandate accurate loan disclosure; (3) create a fund to help homeowners avoid foreclosure; and (4) close the bankruptcy loophole for mortgage companies.

So there you have it. The Democrats seem to have given the subprime meltdown more thought than the Republicans, with the possible exception of Ron Paul, whose solution involves a fundamental change to the market.

[Caveat Emptor crosspost]

CPSC Drags Its Feet on Critical Safety Warnings

  A new Public Citizen report, Hazardous Waits: CPSC Lets Crucial Time Pass Before Warning Public About Dangerous Products, takes the Consumer Product Safety Commission to task for failing to compel manufacturers to provide prompt notice of hazardous products and raps the CPSC for dragging its feet on passing those warnings on to the public.  A study of 46 cases since 2002 in which the CPSC fined companies for violating the reporting law — which calls on manufacturers to notify the agency "immediately" after learning of product safety risks — found that companies waited an average of 993 days, or 2.7 years, before informing the CPSC. The CPSC then delayed an average of 209 additional days before warning the public. 

The hazards that were kept from the public are serious. They included coffee makers and vacuum cleaners prone to catching fire, treadmills that spontaneously accelerated to an Olympic miler’s pace, all-terrain vehicles with throttles that became stuck in the “go” position, bicycles with forks that could break under normal use, and infant swings that could cause strangulation and were implicated in six deaths.

Pres. Clinton and Gov. Schwarzenegger Team Up To End Payday Loans

U.S. PIRG's Consumer Blog has this interesting post about a Bill Clinton-Arnold Schwarzenegger op-ed in the Wall Street Journal last week discussing their joint effort to end payday loans. As the PIRG blog summarizes: "They want to terminate demand for payday loans by opening up a supply of better-priced, affordable bank accounts." Another chapter in the Terminator's activist political career. Take a look.

Jack Kemp on Using Bankruptcy Law to Help Mortage Borrowers

Jack Kemp, former Member of Congress, Secretary of Housing and Urban Development, and Republican vice presidential candidate, has a column here in the Christian Science Monitor supporting changes in the bankruptcy laws to help consumers facing default on their mortgage loans.  Some excerpts:

* * * Under current [bankruptcy] law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable, and adjust the secured portion of loans down to the fair market value of the underlying property – all secured loans, that is, except those secured by the debtor's home.

This gaping loophole threatens the most vulnerable with the loss of their most valuable assets – their homes – and leaves untouched their largest liabilities – their mortgages.

* * *

The proposed Emergency Home Ownership and Mortgage Equity Protection Act being considered by Congress would [close the so-called loophole]. It is targeted only at subprime and nontraditional mortgages and will be available for only seven years after it is enacted in order to mitigate against the next wave of exploding interest-rate resets.

* * * It is estimated that more than 600,000 homeowners could use bankruptcy protection to modify their loans and stay in their homes.

Some argue that expanding bankruptcy relief for homeowners would encourage frivolous bankruptcy filings, but recent reforms have made filing a very onerous process. People who bought homes with the intent of flipping them two years later are not going to go through the aggravation, embarrassment, and cost of bankruptcy.

The folks at Credit Slips have also blogged on proposals to allow stripdowns.