The Bank Lobby's Insane Assault on Consumer Protection
Without question, the most important part of President Barack Obama's new plan for financial regulation is the creation of a special regulator to protect consumers.
If the administration's plan goes through, the existing sieve of consumer protections in the financial world will finally be consolidated into a single agency that answers only to consumers, not bank balance sheets. Anyone who sells financial products to consumers, from the lowliest mortgage brokers to high-flying Wall Street elites, will finally have to play by a single, fair set of rules.
You might think that after watching predatory mortgage lending drive the entire global economy off a cliff, the bank lobby would try to keep a low profile during the debate. But you would be wrong.
The bank lobby, led by the terrifyingly powerful American Bankers Association, is in full-on attack mode. And while Big Finance has several aspects of the Obama overhaul in its sights, it's fighting hardest against the new consumer regulator. The ABA has already launched a barrage of money, distortions, contradictions and outright lies in an attempt to protect its inalienable right to pillage our pocketbooks.
Nowhere was this more apparent than in a July 14 hearing before the Senate Banking Committee in which ABA Chairman and CEO Ed Yingling attempted to rewrite the history of the financial crisis as a story in which bankers are completely innocent and a mysterious, unregulated shadow banking system emerged to corrupt the prudent and consumer-friendly banking business.
"It is now widely understood that the current economic situation originated primarily in the unregulated or less-regulated non-bank sector," Yingling said in written testimony. "For example, the Treasury's plan noted that 94 percent of high-cost mortgages were made outside the traditional banking system."
The statement is shockingly misleading. Yingling implies that banks had almost nothing to do with the subprime implosion, when in fact, they were the primary players. The largest subprime mortgage lenders throughout the boom, and even into today, are the big, mainstream banking companies, including Wells Fargo, Citi, Chase and HSBC, according to data from the National Mortgage News, a banking trade publication. In 2006 alone, Wells Fargo Home Mortgage issued more than $74 billion in subprime loans.
So how does Yingling get away with this blatant distortion? By falling back on a series of complex corporate distinctions. When Yingling says "bank," he's referring to the place you deposit your paychecks, places with branches that have simple names like "Citibank." These banks are regulated by federal agencies like the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). Citibank's primary regulator is the OCC.
But all of the major banks are owned by a much bigger corporate holding company. Citibank, for instance, is a subsidiary of Citigroup Inc., which has dozens of other subsidiaries where it can hide its activities from the OCC. Citigroup's main subprime issuer was a company called CitiFinancial -- a specialty lender that was "outside the traditional banking system" by virtue of not being part of Citibank, but was very much part of the same corporate behemoth.
The Federal Reserve has regulatory supervision over the big bank holding companies, and by extension, the crazy specialty subcompanies the holding companies own. But in 2001, Fed Chairman Alan Greenspan ruled that the Fed would not be regulating consumer protection at the holding-company level, which meant that nobody was watching any of these specialty units. Only Citibank itself was subject to federal supervision.
"The Fed has never cared about regulating anything," says William Black, who teaches law and economics at the University of Missouri at Kansas City but was a senior banking regulator in the 1980s.
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."
"Safety and soundness regulation" means "protecting bank profits." The idea is that if a regulator were really worried about a bank's profitability, it would not let the bank make loans that could not possibly be paid back. Thus, Yingling and his cohorts claim, there is no need for a separate regulator devoted exclusively to protecting consumers. In fact, focusing on consumers would actually confuse everyone and make the whole process fall apart.
This is a complete lie. Bank profits and consumer protection do not in any way go hand-in-hand. Wells Fargo specialized in making egregious subprime loans and selling them off to Wall Street investors. When the consumer got in over his or her head and faced foreclosure, Wells Fargo didn't lose a dime -- some firm on Wall Street took the hit.
"The existing regulatory agencies are principally concerned with safety and soundness. All of them have at least some theoretical jurisdiction over practices that are abusive to consumers, but they have not done a good job," says Rep. Brad Miller, D-N.C., the chief advocate of the consumer regulator in Congress. "That understates it. They've done an abysmal job of protecting consumers."
The funny thing is, Date notes, the ABA made exactly the opposite argument when the Fed was considering imposing consumer protections on the subprime sector.
In a 2006 letter to the Fed about its new consumer-protection "guidance" rules, the lobby group wrote, "The Guidance combines safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them."
"The argument is a complete about-face from what the ABA was saying between 2004 and 2006," Date says.
But despite the bank lobby's constant assault on the truth, U.S. consumers and any standard of fair play, there are disturbing signs that powerful lawmakers are still far too acquiescent to its perspective.
"Ed Yingling is an old friend and a person we respect immensely," said Senate Banking Committee Chairman Chris Dodd, D-Conn., at the July 14 hearing. "All of us here have worked with Ed Yingling for many, many years and have a high regard for him."
The bank lobby's effectiveness at fending off consumer protections over the past decade proves an important point. There is no major organization at the federal policy table that can defend ordinary consumers against the multitrillion-dollar banking industry.
We need a new regulator for consumers, and we need it now.