May 28, 2024

Feds thwart states’ role in curbing predatory lending

United States taxpayers have assumed responsibility for over $5 trillion in home mortgages as a result of the federal takeover of Fannie Mae and Freddie Mac. A broader bailout of the financial industry is pending, after a series of collapses that would have been unthinkable just weeks ago.

Turmoil originating in the home mortgage market left the federal government with no choice but to take action. There are no atheists in a foxhole, and there are no libertarians in a financial crisis.

But how did we get to this point? Specifically, what does this say about how the state and federal governments share power and responsibility?

The crisis began years ago with the rapid expansion of home mortgage lending. The increase was driven by deceptive marketing, loan payments that exceeded the borrower’s ability to repay, hidden fees that drained home equity, and poorly understood mortgage terms that benefited unscrupulous brokers while leaving homeowners with higher interest rates than those for which they qualified.

Several state attorneys general identified the problems early on and worked to curtail them. In 2003 Maine Attorney General Steven Rowe obtained a $1.6 million settlement from Household Finance-Beneficial Finance, securing refunds for 2,150 Maine families who fell victim to these unscrupulous and illegal practices.

By challenging questionable lending practices, Rowe and other state attorneys general were not only protecting individual victims, they were stabilizing a sector of the national economy.

Authorities in Washington had no response, and initially did not even seem to notice. But that was not the worst of it. While the states were closing in on home mortgage scams, a little-known federal agency called the Office of the Comptroller of the Currency, or OCC, issued rules blocking further state action. The OCC went so far as to sue the attorneys general to stop their investigation of predatory lenders.

This was a remarkable departure for the OCC. Never before had the OCC promoted lending practices that not only jeopardized the welfare of consumers, but also destabilized the very markets the agency was supposed to oversee.

Meanwhile, an unprecedented alliance of attorneys general and banking officials from all 50 states – Democrats and Republicans – urged the federal government to either address the growing problem or allow state officials to do their jobs. These pleas went unheard by the administration in Washington.

What might have happened if the OCC had not thwarted state officials? Is it possible that state lawmakers, attorneys general and banking regulators could have curtailed the worst lending practices and thereby averted the mortgage crisis that necessitated the takeover of Fannie Mae and Freddie Mac, the bailout of Bear Stearns, the bankruptcy of Lehman Bros., and now the largest taxpayer intervention in United States history?

I believe that action by state authorities – who are much more attuned to events in local markets such as home mortgage lending – would have reduced the financial turmoil that now threatens the downstream markets and has now put taxpayers on the hook for the mortgage mess and the ensuing financial crisis.

For many years the administration in Washington has been ambivalent if not hostile to economic regulation. State authorities have taken a more balanced approach. Ironically, “free market” and “small government” ideologues set us down the path toward new taxpayer burdens in the secondary mortgage market and beyond.

This is the predictable consequence when anti-government ideology is not tempered by at least a little regulatory muscle. The attorneys general were ready to provide that muscle, but they were forced to the sidelines just when the crisis intensified.

As a lawmaker, I helped craft some of the toughest anti-predatory lending laws in the country. But more is needed. We need an attorney general who will fight to hold violators accountable, even when it means fighting against the federal regulators, as Attorney General Rowe has done.

Something went terribly wrong in the mortgage lending markets, and federal interference made it even worse. Let’s hope the next administration has learned from both the victimized homeowners and the deteriorating financial markets.

The states have a vital role to play, and the federal government should either lead, follow or get out of the way.

Rep. John Brautigam, D-Falmouth, is House chairman of the Legislature’s Insurance and Financial Services Committee. He is a candidate for attorney general.

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