Federal regulators in the Bush administration blocked attempts by state governments to prevent predatory lending practices that resulted in the financial crisis now stalking the American economy, a new study from the University of North Carolina says.
In 2004, the Office of the Currency Comptroller, an obscure regulatory agency tasked with ensuring the fiscal soundness of America's banks, invoked an 1863 law to give itself the power to override state laws against predatory lending. The OCC told states they could not enforce predatory-lending laws, and all banks would be subject only to less-strict federal laws.
Now, a research paper (PDF) from UNC-Chapel Hill's Center for Community Capital shows that those anti-predatory lending laws had actually worked. States that had stricter regulations on issuing mortgages were found to have fewer foreclosures.
"We believe that these findings are remarkable, since they suggest an important and yet unexplored link between [anti-predatory lending laws] and foreclosures," the study's authors state.
The study may be the first scientific evidence to back up claims made by many critics that the Bush administration and earlier administrations allowed last year's financial crisis to happen by not enforcing common-sense regulations on lenders.
Last year, seven months before the collapse of Lehman Brothers and the ensuing government banking bailout, then-New York Governor Eliot Spitzer wrote a Washington Post column in which he described how the Bush administration blocked states' efforts to prevent a crisis in the mortgage industry.
Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.
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.
Spitzer's Post column ran a month before the New York Times reported that federal authorities were investigating Spitzer as a patron of high-end hookers, ending his political career and long-running crusade against corporate malfeasance. Some observers, including investigative reporter Greg Palast, say this was not a coincidence.
The UNC study "is a perfect reminder, as Congress and the administration tackle financial regulatory reform, that not all regulations are onerous, anti-business, and aimed at choking off financial innovation," writes Mary Kane at the Washington Independent. "And it’s more evidence that borrowers buying beyond their means weren’t the only only players in the sub-prime mess."