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The Bank Lobby's Insane Assault on Consumer Protection

Even after causing millions of foreclosures and the worst recession since the 1930s, the bank lobby is still trying to screw us.

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This makes Yingling's statement especially galling. The reason for CitiFinancial's existence was to make subprime mortgages "outside the traditional banking system" where they would not be subject to regulation. It's not as if some shadowy industry emerged that bank holding companies like Citigroup were unaware of. Citigroup intentionally exploited loopholes in the regulatory system to create a shadow banking system under its own roof. 

But even the ordinary banks, the places called "Citibank" and "Wachovia Bank," systematically outsourced much of their lending activity to independent mortgage brokers.

Mortgage brokers don't have any money to lend. All they do is find borrowers, get them to sign a loan contract, pass the contract on to a bank that lends the money, and collect a fee from the bank.

The whole point of this charade was to distance the bank from the bad practices of the mortgage broker, while allowing the bank to take on as much subprime garbage as possible. These brokers were not subject to federal regulations, and the banks did not have to perform rigorous audits of the brokers' activities. Brokers routinely steered borrowers into loans they could not afford and frequently falsified loan documents to justify it.  

"Underwriting and due diligence became a farce," says Black. "Loan quality just went out the window." 

"Everybody knew this was a festival of fraud," says Raj Date, a former executive with Capital One Financial, who left the company when it acquired a subprime lender. Date now heads a think tank called the Cambridge Winter Center for Financial Institutions Policy. "Every single market participant knew the whole thing was a massive, massive fraud." 

So the brokers were "outside the traditional banking system" in the sense that they were not employees of Citibank or Wells Fargo Bank, but their entire business depended on payouts from the banks. And the banks were actually lending the money.

In 2004, the Fed finally started thinking seriously about regulating consumer protection at the level of the parent companies and finally started thinking about making banks audit their mortgage brokers. But the American Bankers Association lobbied heavily against both measures, successfully stalling the Fed for years while the subprime bubble fueled bigger and bigger bank profits, and grew more and more dangerous for the global economy.

To fend off the new rules, the ABA even cited the "longstanding policy of the Federal Reserve Board not to conduct consumer examinations of ... nonbank affiliates." By the time the Fed actually took action, in the fall of 2006 -- issuing a set of "guidelines" that were so weak that they had to adopt new regulations in 2008 -- the subprime horse was way, way past the barn door. 

And of course, throughout this insanity, regulators who had authority over banks that were behaving badly -- the Citibanks and Wells Fargos -- failed to hold them to decent consumer-protection standards. 

"The OCC and the OTS get their funding by collecting fees from the banks they're regulating, which created this regulatory competition in laxity," says Dean Baker, a prominent economist and co-director of the Center for Economic and Policy Research. "The banks could pick and choose between regulators. I don't think there will be that sort of issue with the Consumer Financial Protection Agency, because they're going to have authority over everybody." 

Clearly, the bank lobby's "it's not our fault" excuse doesn't hold water. Which may be why Yingling's written testimony repeats the following argument no less than six times in different formulations: 

"Consumer regulation and safety-and-soundness regulation are two sides of the same coin. Neither one can be separated from the other without negative consequences; nor should they be separated. ... The current regulatory structure applied to banks provides an appropriate framework for effective regulation for both consumer protection and bank safety and soundness."

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