Kia Franklin
The Bush Administration’s Preemption Legacy
Cross Posted From TortDeform.Com:
The other day a friend of mine and I were discussing the collapse of the financial market. She said to me that "we all know how this happened." I was afraid to take the bait, because as she's more of a political conservative, we've had many a tense conversation. But I had to. I cited to corporate greed, lack of effective regulation, the sad victim stories about foreclosures that have resulted from predatory lending, etc. In response, she told me that the problem was irresponsible people taking on too much debt, when they know they shouldn't. They should be more realistic. They need financial literacy. (Interestingly, my colleague Mark Winston Griffith points out how the recent Countrywide settlement seems to suggest "the culpability of lenders in the foreclosure crisis, as well as the responsibility they should assume in helping homeowners avoid foreclosure.")
There we had it--two very distinct narratives to describe what went down. But if you think about who's the most sophisticated, the most informed party in these transactions, and who has the most to gain from them, that would indicate that particular attention should be given to the role of industry insiders who stand to benefit from exploiting and misleading other people into taking bad loans. Many, many states agreed that the group to really watch out for were the irresponsible lenders. They saw what was happening and were concerned. But the feds didn't care, even if they agreed. From Business week, here's an article on how federal preemption played a role in creating and exacerbating the mortgage crisis:
A number of factors contributed to the mortgage disaster and credit crunch... One cause, though, has been largely overlooked: the stifling of prescient state enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology.The Bush Administration and many banks clung to what is known as "preemption." It is a legal doctrine that can be invoked in court and at the rulemaking table to assert that, when federal and state authority over business conflict, the feds prevail—even if it means little or no regulation.
Now, let's look at how the lines of disagreement about the role of preemption in this mess draw out.
One one side, representing folks who say the Bush administration through the OCC and the OTS did everything they could to help lenders oppose state actions intended to prevent mortgage fraud, we have state attorneys generals and groups like the Center for Responsive Lending. Kathleen Keest of Center for Responsive Lending, also a former assistant attorney general in Iowa, said: "[Preemption] pushed aside state laws and state law enforcement that would have sent the message that there were still standards in place, and it was a big part of the message to the industry that it could regulate itself without rules."
On the other side, representing the folks who say preemption did not play a role in the subprime crisis are Washington insiders like John D. Hawke, Jr., banking industry lawyer, Clinton-appointed head of OCC, and now an attorney at Arnold & Porter in D.C. He says: "That's bull---." Eloquently put, Hawke! What can one say in response?
One of the most intriguing state consumer protection laws that was prevented from coming into fruition was a Georgia law that would have established "assignee liability" for fraudulent mortgages--basically making it more difficult for banks to duck responsibility for loans that went bad because they were too risky. The industry opposed assignee liability for obvious reasons--they were riding on so many overly risky, bad loans, that actually having to take responsibility for them would seriously undermine their profits. We can't have that happen!
By the way, Business Week points out that today Georgia has the 6th highest foreclosure rate. Interesting...
So when you think preemption, think about the mortgage meltdown. Not to be alarmist, but if this isn't an indicator of why it's important to have both a) strong federal protections backed by effective federal regulation, and b) protective state consumer protection laws as a solid back up to pick up the slack when the feds fail, then I don't know what is.
Kia Franklin: Author Bio | Other Posts
Posted at 2:58 PM, Oct 17, 2008 in Civil Justice
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Comments
There is always a need to reach an utlimate conclusion about who to place blame on. In this housing disaster, it really was most of our government, irresponsible borrowers and homeowners and lastly, irresponsible lenders.
While many of these opinions are very biased towards the right wing, I have to say that Barney Frank and Maxine Waters in particular, were the biggest champions of Fannie and Freddie. The Wall Street Journal ran an article on what proponents those two were in basically saying less regulation was needed, not more. These are two individuals who sit on the finance committee and neither of them could even tell me what an annual report is if I begged them. It is political greed and the desire to get re-elected that drives poor policy...as long as people were in homes, the Dems and some Republicans saw no need to question how they got there.
Owners are next to blame. When is this coddling environment in America going to stop? If you cannot afford something, it is your responsibility as an adult to save until you can afford what it is you desire. Homeownership is part of the American dream, but it is a privlege that takes many years of saving and work, not your birthright. This extends to all consumption in this country. We are sliding down a dangerous slope when we excuse people for their personal behavior and decisions, it is not fair to those who stay prudent and it is especially unfair to those who are not prudent, because they will never emerge from their poor decision making if they dont learn their lesson.
Lastly, underwriters are to blame. Let us be clear that a blanket term such as "wall street" is very irresponsible. Many of these firms who issued bad loans were mortgage brokers and some bigger commerical banks such as Bank of America or Citi etc. At the end of the day, they got caught up in greed and threw out the fiduciary responsibility they have to their own shareholders even, to prudently expand and make profits not play musical chairs until the music stops.
All of these points speak to one even larger point. The point being that this country has a lot of misaligned interests. Somewhere along the way, we became an impatient society that is focused on results today instead of building and planning for years down the road. It is this reckless behavior that will ruin us. We borrow today to consume and worry about tomorrow. We make political decisions today that are popular, but not necessarily right. We issues loans today that boost the bottom line for the next few years, but can destroy entire companies.
I am not sure how to solve this. My best guess is that all of this country will need to learn its lesson and and plan for the future by making painful concessions today.
Posted by: Hassan | October 20, 2008 07:48 PM