Now that the blame game for the financial meltdown is in full swing (Democrats? Republicans? Bush? Clinton?), it's getting harder than ever to wade through the partisan opinions out there to get a straight answer. For its part, Business Week has a story in the current issue that discusses what happened when some officials from various states tried to warn the feds about the coming crisis:
More than five years ago, in April 2003, the attorneys general of two small states traveled to Washington with a stern warning for the nation's top bank regulator. Sitting in the spacious Office of the Comptroller of the Currency, with its panoramic view of the capital, the AGs from North Carolina and Iowa said lenders were pushing increasingly risky mortgages. Their host, John D. Hawke Jr., expressed skepticism...
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Monday, October 13, 2008
States tried to warn about subprime mortgage crisis in 2003?
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Georgia was also trying to limit subprime loans with the Fair Lending Act but the Office of the Comptroller of the Currency overruled them.
Here's what happened.
• In 2002 Georgia passed the Fair Lending Act. Basically the law said that any company that purchased loans that were deemed to be predatory could be held liable.
• It was virtually impossible to tell which subprime loans were predatory so the secondary market stopped purchasing subprime loans. When the sources of funds disappeared, financial institutions stopped making subprime loans in Georgia.
• This was Georgia’s way of protecting subprime borrowers and New York, New Jersey and New Mexico were in the process of passing the same type of law when the federal government intervened.
• At the request of the banking industry the Office of the Comptroller of the Currency, a Federal Institution, ruled that the Georgia law was in conflict with Federal Law and could not be applied to National Banks. Because that would give National Banks an unfair advantage over local banks, the legistlation was killed.
• The Office of the Comptroller of the Currency issued a statement to the effect of ‘we know how to deal with predatory lending’. In retrospect they were obviously wrong.
Why do we allow lobbyists from the banking industry to influence legislation?
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