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.
Attorneys general in 50 states, including Tom Miller of Iowa, are conducting a joint investigation into the bank practices that led to the mortgage foreclosure troubles.
Go to your Portfolio »
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.”
Read Full Article »