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.