One of the planks in the Obama administration’s plan for financial regulation is ensuring that states are allowed to strengthen mortgage standards if they feel that the federal standards are not tough enough or if they notice a problem unique to their state that needs addressing. Yesterday, the Mortgage Bankers Association (MBA) wrote a letter to Treasury Secretary Tim Geithner and National Economic Council Director Lawrence Summers to complain about this idea:
The Mortgage Bankers Association has weighed in against an Obama White House proposal to allow states to write tougher lending rules than the federal government. “Anything short of federal preemption risks perpetuating one of the problems of today’s regulatory structure for mortgages and would seem to be inconsistent with key objectives of the administration’s plan,” MBA Chief Executive John A. Courson wrote Thursday.
But we’ve been down that road before, and it’s one of the reasons that we’ve wound up with the mortgage mess that we have on our hands today.
In 2002 and 2003, various states, including Georgia, New York, New Jersey, and New Mexico, proposed laws aimed at cutting down on predatory lending and subprime mortgages, which were becoming increasingly large problems. But then, citing the “increased costs and an undue regulatory burden” on banks, both the Office of Thrift Supervision and the Office of the Comptroller of the Currency swooped in to exempt national banks from state standards, preempting anything that the states might do.
At the time, Diana Taylor, the New York superintendent of banks, said “I am concerned because this is an unelected official in Washington who is overruling state legislators by regulatory fiat. The state legislature has a better idea of the consumer situation in the state than an unelected official in Washington.” Of course, we now know the havoc that subprime lending wreaked on the economy.
Obama has already directed executive branch officials “to review every regulation adopted in the past ten years to scrub them of inappropriate preemption language.” His goal of not preempting state lending regulations is simply consistent with this approach. But the MBA would rather the banks stay under the same sort of regulatory regime that missed the subprime mess in the first place.