Wednesday, March 14, 2007



FED, OCC Publicly Chastised Few Lenders During Boom

By Craig Torres and Alison Vekshin

March 14 (Bloomberg) -- The Federal Reserve and the Office of the Comptroller of the Currency took little action in public to police the $2.8 trillion boom in the U.S. mortgage market -- whose bust now risks worsening the housing recession.

The Fed, which is responsible for the stability of the banking system, didn't publicly rebuke any firm for failing to follow up warnings on home-lending practices between 2004 and 2006. The OCC, which supervises 1,793 national banks, took only three public mortgage-related consumer-protection enforcement actions over the same period.

Consumer advocates and former government officials say the regulators, by acting behind the scenes rather than openly advertising the shortcomings of some firms, failed to discipline an industry that loaned too much money to borrowers who couldn't repay it.

Now, more lenders are being forced to shut and foreclosures are rising, threatening to scuttle any chance of an early recovery in housing.

``There was tension between the responsibilities not to mess up some banks' businesses and the responsibility to consumers,'' said Edward Gramlich, a Fed governor from 1997 to 2005 who is writing a book about the mortgage market at the Urban Institute in Washington. The result, he said, is that ``we could have real carnage for low-income borrowers.''

Private Actions

Officials at the Fed and OCC say their examination process was rigorous and resulted in private enforcement and correction of abuses.

The agencies say they aren't allowed to disclose how many non-public actions they took between 2004 and 2006 that were aimed at protecting consumers from home-loan abuses. Private enforcement action ``contains confidential supervisory information,'' said Susan Stawick, a Fed spokeswoman in Washington. The OCC considers the information ``proprietary and confidential,'' said Kevin Mukri, a spokesman in Washington.

``Making sure people understand what they're getting into is very important,'' Fed Chairman Ben S. Bernanke said in Stanford, California, on March 2. ``We've issued several guidances. We hope that they'll be helpful.''

Mortgage delinquencies rose to 4.95 percent in the fourth quarter, the Mortgage Bankers Association said yesterday; that's the highest level since the second quarter of 2003. The trade group said 13.33 percent of ``subprime'' borrowers --those with poor or limited credit histories -- were behind on payments, the highest rate since the third quarter of 2002.

Because borrowers are having difficulty paying in a time of economic expansion and low unemployment, Congress and consumer advocates want to know how regulators allowed lenders to write loans borrowers would never be able to repay.

Prodded by Dodd

After being rebuked for foot-dragging by Senator Christopher Dodd, a Connecticut Democrat who chairs the Senate Banking Committee, federal regulators issued proposed guidelines aimed at subprime lending on March 2.

``We ought to let businesses decide how to price their products,'' said William Isaac, who oversaw the largest rescue of bank depositors in American history as chairman of the Federal Deposit Insurance Corp. from 1978 to 1986. Still, he said, ``if you are putting a whole bunch of teaser loans out there and people aren't going to be able to afford them when they pop up in three years, the government has the responsibility to look into these institutions and say, `What are you going to do?'''

The subprime industry's woes have their roots in the tenure of former Fed Chairman Alan Greenspan. The Greenspan-led Fed collapsed its benchmark rate to 1 percent in 2003 and kept it there for over a year, helping foster a housing bubble.

Philosophically Opposed

At the same time, Greenspan was philosophically opposed to heavy-handed intervention or rule-writing, and favored self- regulation and the primacy of markets. The former chairman declined to comment.

As Wall Street's appetite for high-yielding mortgage bonds drove demand for high-risk loans, lending standards declined. Subprime mortgages almost doubled to $640 billion in 2006 from $332 billion in 2003, according to the newsletter Inside B&C Lending.

In response, the Fed and other regulators issued non- enforceable warnings, advising bankers and federal examiners about best practices in mortgage lending. Agencies issued guidelines defining unfair and deceptive practices in 2004, on home-equity lending in 2005, and on non-traditional mortgages in 2006.

Shared Responsibilities

While the Fed and OCC regulate the largest banks, some responsibilities are shared with three other federal agencies: the FDIC, the Office of Thrift Supervision and the National Credit Union Administration.

Federal bank regulators say their authority is limited to the institutions they oversee and doesn't extend to the state- chartered mortgage brokers that represent a large share of the industry.

Consumer advocates say the Fed has expansive authority and could have stopped abuses. The Truth in Lending Act gives the Fed rule-writing authority over disclosures for consumer credit among all financial institutions. The Home Ownership and Equity Protection Act of 1994 also gave the Fed a role in preventing predatory lending, according to consumer advocates.

In addition, federally regulated banks and Wall Street firms are often the financiers standing behind state-regulated mortgage lenders. New Century Financial Corp., the nation's second-biggest subprime lender, includes Morgan Stanley, Citigroup Inc., and Goldman Sachs Group Inc. -- all regulated by federal agencies -- among its creditors. Gramlich says the Fed should seek an expansion of its authority to supervise mortgage subsidiaries of bank holding companies.

`Systematic Fraud'

``There is no question that mortgage brokers are on the street committing systematic fraud on the American homeowner,'' said Irv Ackelsberg, a Philadelphia attorney who testified at a Fed hearing last year in the city. He said there is a ``lack of will'' on the part of the Fed to use its power to stop abuses.

Fed officials defend their approach, saying that over- zealous regulation might cut off credit to people who need it most.

``There is going to be a fraction of people that get the wrong product and that is regrettable,'' Richmond Fed President Jeffrey Lacker said in an interview. ``Should we do something to limit that probability? Well, we could, but it would also limit credit to people for whom that is the right product.''

Fed and OCC officials say their routine bank examinations, which aren't disclosed, have enabled them to intercept trouble as they find it. Together, the organizations oversee financial institutions with more than $8.2 trillion in assets.

`Process Is Working'

``The problem is normally addressed through non-public supervisory and informal actions, and only rarely reaches the point where a formal action is necessary,'' said the OCC's Mukri. ``In fact, the relatively low number of formal actions is an indication that the supervisory process is working.''

The Fed's Stawick said the central bank ``has in place a rigorous supervision and examination program and routinely examines the institutions it supervises for compliance with all consumer protection requirements.''

While no enforcement actions resulting from the Fed's consumer-loan guidelines have been disclosed, ``non-public action has been taken,'' Stawick added.

Total OCC enforcement actions against banks, both public and private and omitting so-called affiliated parties, averaged 81 a year between 2004 and 2006. Fed banks completed 102 non- public enforcement actions in 2004 and 95 in 2005, including those against affiliated parties. Data for 2006 aren't yet available.

The Right to a Remedy

Critics say the regulators' private responses harm consumers by depriving them of information they might need to take action on their own behalf. ``Borrowers hurt by an abusive practice have the right to a remedy,'' said Alys Cohen, a staff attorney at the National Consumer Law Center in Washington.

The Fed has published some large enforcement orders. CitiFinancial Credit Company of Baltimore, a subsidiary of Citigroup Inc., paid a fine and restitution to customers that totaled $70 million or more under a 2004 order, according to the Fed. The disciplinary action was related to home and personal lending between 2000 and 2001, prior to the mid-decade surge in mortgage lending.

Fed officials last year held lengthy hearings on home lending in four cities, where they were warned about predatory lending and given specific examples of abuses by witnesses.

One witness at a June 9 hearing in Philadelphia was Ackelsberg, who received a 2001 award from that city's bar association for his work for the public interest.

`Fundamentally Broken'

Ackelsberg told former Fed Governor Mark Olson and Consumer Affairs Director Sandra Braunstein that the subprime market was ``fundamentally broken,'' and presented an example of a loan that left a Social Security recipient with about $10 a day to live on after she paid her mortgage.

He and other critics say the lack of public action is symptomatic of a too-cozy relationship between the overseers and the overseen, with consumers and the U.S. economy paying the price. ``We have regulators almost competing with one another to be clients of the industry,'' said David Berenbaum, executive vice president for the National Community Reinvestment Coalition in Washington ``What we need is for regulators to be competing to offer consumer protection.''

To contact the reporters on this story: Craig Torres in Washington at ; Alison Vekshin in Washington at .

Last Updated: March 14, 2007 11:06 EDT

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