Posted on Friday, November 5, 2010
Have you noticed that the lead dogs investigating the mortgage foreclosure mess are not any federal prosecutors or national bank regulators, but rather the state attorneys general? I sure have. I can’t think of a more encouraging development.
Yeah, yeah, a handful of federal investigations have also been announced, but we all know that they’re not going to amount to a hill of beans. Ever since the financial crisis began two years ago, the federal overseers of the banking industry have been consistently unwilling to take the rod to the institutions they regulate. The robo-signing scandal — and it is, unquestionably, a scandal — hasn’t changed that attitude one iota.
The Treasury Department and the Federal Reserve have made it clear that they are more concerned about keeping the foreclosure mill going full speed than they are about determining whether the banks broke the law. Somehow throwing people out of their homes quickly is supposed to help the economy. Or so they keep telling us.
Ah, but the states. They’re a different story. Soon after tales of robo-signing began making headlines, the state attorneys general, led by Tom Miller of Iowa, mobilized their forces. Practically overnight, all 50 of them agreed to conduct a joint investigation into the bank practices that led to the scandal.
Unlike the feds’ tepid efforts, this will be a serious investigation, led by a handful of assistant attorneys general who’ve worked together for years, and who see this as their chance to finally do something for beleaguered homeowners. They’ve got resources, subpoena power and a justifiable suspicion that the robo-signing shenanigans are just the tip of a very ugly iceberg.
And best of all, they have a very clear idea of what they are trying to accomplish. They don’t want to merely reform the foreclosure system (though that would be nice, wouldn’t it?). Nor do they particularly want a big financial settlement, which would be meaningless for a giant like Bank of America.
Rather, they hope to use their investigation as a cudgel to force the big banks and servicers to do something they’ve long resisted: institute widespread, systematic loan modifications. “Instead of paying a huge fine,” Mr. Miller posited to me the other day, on his way to an election rally, “maybe have the servicers adequately fund a serious modification process.” Getting the banks and servicers to take loan modification seriously is another in a series of areas where the Obama Treasury Department has failed miserably.
There’s one more reason to cheer the involvement of the states. During the bubble, it was the state attorneys general who first saw the problems in subprime lending. But whenever they tried to do something to halt the predatory lending and outright fraud, they were stopped cold by the federal bank regulators, who consistently sided with the banks in court. It is not too much to say that if the states had succeeded, the subprime crisis might never have occurred.
Now, with the mortgage foreclosure mess, they’re back — and the feds can’t stop them. It’s about time.
It should be obvious why state attorneys general were more attuned than the feds were to the problems with subprime lending: they weren’t cocooned in Washington. “The A.G.’s are much closer to these problems,” said Prentiss Cox, a professor at the University of Minnesota Law School. “They live in these communities. They know what the reality is on the ground.”
During the subprime bubble, homeowners who felt victimized by a mortgage originator or a bank could walk in the door of the attorney general’s office. Often, that’s exactly what they did. Employees in the A.G. offices looked at homeowners’ documents and interviewed them face-to-face — giving them a first-hand understanding of how bad things were. By contrast, the Office of the Comptroller of the Currency set up an 800 number in Houston for aggrieved consumers.
Not that the O.C.C. ever really worried about the exploitation of consumers. On the contrary, the O.C.C. and the Office of Thrift Supervision, the two primary federal regulators of the banking industry, viewed their role, incredibly, as protecting banks from consumers rather than the other way around.
They consistently went to court to block efforts by states to put a stop to predatory lending. Their primary weapon was the doctrine of pre-emption, which said, in effect, that because the national banks were governed by federal rules, they were immune from state consumer protection laws. The success of both agencies in asserting pre-emption — which they also used as a marketing tool to make their charters more attractive to potential bank “clients” — actually forced some states to roll back their antipredatory lending laws.
“The federal regulators should have been listening to us instead of trying to shut us down,” said Mr. Cox, who at the time was an assistant attorney general in Minnesota in charge of consumer enforcement. “They weren’t interested in our perspective. They viewed our concerns as trivial.”
Though unable to touch national subprime lenders like Washington Mutual and Wachovia, the state A.G.’s weren’t completely neutered. Some of the worst subprime offenders, like Household Finance and Ameriquest, operated outside the national bank system — and the states were able to start significant investigations against them.
In 2002, for instance, a coalition of attorneys general and the Federal Trade Commission settled a predatory lending suit against a subprime lender called First Alliance; it called for the company to pay up to $60 million to reimburse homeowners it had victimized. That same year, the A.G.’s reached a settlement with Household Finance for $484 million.
And in January 2006, the same coalition of A.G.’s reached a settlement with the worst bottom-feeder of them all, Ameriquest, which agreed to pay $325 million and reform its lending practices. So dependent was Ameriquest on fraudulent lending practices that it couldn’t survive once it had to stop using them. It shut down in the fall of 2008.
As impressive as these victories were, however, they had little impact beyond the individual institutions that had been brought to heel. Although the coalition of A.G.’s that went after Household Finance and Ameriquest absolutely understood how widespread predatory lending was, there was nothing they could do about that larger problem. All the mortgage institutions that came under the regulatory purview of the O.C.C. and the O.T.S. could keep on making the same kinds of predatory subprime loans even after Household and Ameriquest had been forced to stop. Their regulators were their enablers.
Today, that same coalition of state prosecutors is the one driving the investigation into the mortgage foreclosure scandal. The key members of the coalition include Iowa — Mr. Miller headed up both the Household and Ameriquest investigations, just as he is heading up this one — as well as Washington State, Arizona, Texas, Illinois and Massachusetts. Because they know and trust one another, the coalition members can move quickly — as indeed they have. One advantage they have this time is that foreclosure is a state matter, not a federal one. The O.C.C. couldn’t intervene even if it wanted to.
Of course they have another advantage this time around: times have changed. No federal regulator would have the nerve, post-financial crisis, to try to block the states from investigating the mortgage foreclosure scandal.
The law has changed too. As a result of the Dodd-Frank law, it will be much harder for a federal regulator to use pre-emption to shut down a state investigation into a financial institution. Under the new law, states can enforce their own state consumer laws against nationally chartered banks — even when those laws are stronger than any parallel federal law. And state attorneys general have been given the explicit right under the new law to enforce the rules and regulations that will soon emerge from the new Consumer Financial Protection Bureau. They might even get some federal money from the agency to help them do it.
Although the bureau won’t be up and running until next July, its current leader, Elizabeth Warren, has already signaled that she plans to encourage the states to take full advantage of their new powers. Mr. Miller has been in contact with her, as has Roy Cooper, the attorney general of North Carolina, who currently heads the National Association of Attorneys General.
“We have a very good relationship with them,” Mr. Miller said, referring to Ms. Warren and the other officials involved in setting up the new bureau. “We’re going to do great things for the American consumer,” he added enthusiastically.
Even though her bureau is not yet functional, Ms. Warren has already offered public support to the A.G.’s as they pursue the banks over the foreclosure mess. In other words, the state attorneys general finally have something in Washington they haven’t had in decades: an ally.
Not surprisingly, the prospect of an alliance between Ms. Warren’s new bureau and a handful of activist attorneys general gives the banking industry the heebie-jeebies. At a panel at the Chamber of Commerce this week, Andrew Pincus, a lawyer with Mayer Brown, articulated their voluminous concerns.
Would the new “federal cop,” as he called the consumer bureau, and the state A.G.’s go after institutions far smaller than the likes of Wells Fargo and Bank of America? Would their efforts hurt entrepreneurship and damp the availability of credit? Would an overly ambitious attorney general stretch the new rules to go after fraud when none truly existed? Wouldn’t there likely be a lot of duplication of effort?
“The bureau doesn’t even have the power to tell a state that it can’t take an enforcement action because it is misinterpreting the rule,” Mr. Pincus complained to me the day after the panel.
Well, maybe. But to my mind, we’re a long way from worrying about the potential abuses by state prosecutors. It’s the abuses by the banks we should be worried about. There’s nothing “potential” about them. They’re as real as they come.
And if the mortgage foreclosure scandal is finally the event that causes the banks to account for their sins, it will be because of the efforts of the state A.G.’s
You know what I say to that prospect? Hip-hip hooray.
By JOE NOCERA
New York Times