The second day of Financial Crisis Inquiry Commission (FCIC) hearings took place today, featuring a lineup of federal and state regulators and attorneys general. Much of the emphasis was on mortgage fraud and predatory lending, as one major factor in the economic crisis was subprime lenders, fueled by Wall Street, who produced a catastrophic decline in mortgage standards.
Now, it stands to reason that regulators would have stepped in and curtailed some of the more pernicious lending practices before they resulted in a full-fledged housing crisis. But the decline in lending standards allowed banks to make a ton of money, and regulators who were primarily tasked with looking out for banks’ bottom lines were loath to step in. As FCIC member Peter Wallison said, “when activities are profitable, it becomes very hard for regulators to stop them.”
Indeed, Attorney General Lisa Madigan (D) explained that she, along with other attorneys general, warned federal regulators about the trouble with the subprime market years before the crisis broke, but that the regulators “had a different agenda”:
I have spoken with people, this would have been 2005, 2006, if memory serves me correctly, about the problems we were seeing, particularly with subprime loans, particularly with no-doc, low-doc loans…The [Office of the Comptroller of the Currency] was well aware, and we did obviously make the OCC aware, that we were looking into not just fair lending practices but other practices of the lenders, in an effort to combat the erosion of underwriting standards. They just had a different agenda.
Federal Deposit Insurance Corp. Chair Sheila Bair confirmed that regulators were hesitant to rein in the banks, saying “it can be very difficult to take away the punch bowl when people are making money at it now.” (And just look at the grief Bair is receiving from the other bank regulators simply for trying to incentivize less-risky Wall Street pay.)
This tale is one more reason to create a Consumer Financial Protection Agency (CFPA) that is tasked solely with protecting consumers from financial abuse and ensuring that financial firms get reined in, especially when it’s predatory practices that are filling their coffers. The CFPA included in the regulatory reform bill that the House passed in December is designed to do just that, but Reuters reported this week that members of the Senate Banking Committee are “talking about reducing the proposed agency’s status, possibly making it instead a division of a new systemic risk regulator or a new super-cop for banks.”
Consumers need their own advocate within the regulatory framework, not a token office within some other agency. The economic crisis proved that the current system is inadequate, and I hope that the Senate (looking at you, Chris Dodd!) remembers that.