fresh voices from the front lines of change







The top U.S. bank regulator, John Dugan, hasn’t even started testifying before the Financial Crisis Inquiry Commission, but he’s already spinning deceptions.

Dugan worked as a bank lobbyist for years before being appointed to his current job by President George W. Bush. Dugan runs an agency called the Office of the Comptroller of the Currency (OCC) and both he and his predecessor have aggressively attacked consumer protections in banking. In the process, Dugan encouraged predatory lending and fueled the financial crisis.

The worst thing the OCC has done in the past decade was the preemption of state regulations against national banks. The OCC regulates the national banks– including the largest banks in the country. But prior to 2004, states could enforce their own rules against national banks operating within their borders. That meant that for national banks, the OCC’s rules served as a regulatory floor– state regulators couldn’t enforce weaker standards than the OCC. But the states could enforce stronger rules than what the OCC enforced.

In 2004, the OCC asserted sweeping powers to preempt state authority over these big banks. By aggressively pushing this agenda, the OCC prevented states from cracking down on abusive national banks. The OCC even joined a bank lobby group to sue state regulators who tried to prevent predatory lending. But here’s what Dugan says about preemption in his written testimony:

If it were true that federal preemption caused the subprime mortgage crisis by preventing states from applying more rigorous lending standards to national banks, one would expect that most subprime lending would have migrated from state regulated lenders to national banks. One would also expect that all bank holding companies engaging in these activities that owned national banks would carry out the business through their national bank subsidiaries subject to federal preemption, rather than their nonbank subsidiaries that were subject to state law . . . neither of these conjectures is accurate.

This is an artful diversion that only an ex-lobbyist could concoct. Preemption was in fact a direct contributor to weakened regulatory standards. Here’s why.

State and federal bank regulators are funded by taxes they levy against the banks they regulate. Banks will go to whatever regulator will give them the most leeway. When the OCC not only refused to enforce predatory lending laws, but actively attacked state regulators who did enforce consumer protections, other states received a clear message: if they want to keep their bank taxes, they have to go easy on their banks. And so about half of all states in fact did go easy on their banks.

But another half of the states decided at some point or another to go after predatory national banks. And anytime that happened, the OCC would intervene and use every legal excuse it could come up with to protect the bank. There are dozens of examples of the OCC engaging in this activity, but the most egregious example is its lawsuit against First Franklin, a bank whose sole raison d’etre was subprime lending. There is no way to construe the OCC’s assault on First Franklin’s state regulator as anything other than an attempt to protect a subprime predator.

Big banks operate dozens of subsidiaries that are regulated by different agencies. When state regulators got aggressive with a subsidiary of a big national bank, the bank would move its predatory mortgage operations under the OCC’s jurisdiction. Since the OCC had preempted state authority, the states would be powerless to do anything about it. The OCC was actively promoting the subprime mortgage operations of these companies, including Wells Fargo, Countrywide, Capital One and others.

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