fresh voices from the front lines of change







A rather nauseating statement from a Government Accountability Office report on foreclosures:

Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers’ foreclosure practices, such as whether foreclosures are completed; however, given the ongoing mortgage crisis, they have recently placed greater emphasis on these areas.

You read that right. Bank regulators in the United States were not even looking at foreclosure practices before the media latched onto the foreclosure fraud outbreak. The Office of the Comptroller of the Currency and the Federal Reserve acknowledged this in hearings two weeks ago, but it's still harrowing to see the degree to which mortgage banking remains totally free of oversight, even after it drove the global economy off a cliff.

The rest of the report is about banks abandoning properties instead of proceeding with a foreclosure sale. Kind of sick-- throw a family out, then just abandon the house altogether, don't even bother to sell it. The GAO says it's not happening too much, but any sane businessperson would make sure that it never happens. A simple loan modification would cut everybody's losses here, but the banks can't be bothered with that. And nobody is bothering the banks about it.

You may recall that there was a tremendous legislative battle earlier this year over the creation of a new Consumer Financial Protection Agency. The bank lobby and regulators at the Fed, the OCC and yes, even the FDIC, all argued that we didn't need it, while essentially everybody else said we did. But the existing regulatory chiefs all made essentially the same argument against the CFPA: We have several regulators who oversee consumer protection, and they're all just great at it. Creating a new agency that focused only on consumer protection would be end up destabilizing the financial system, because regulating consumer protection without looking at bank safety and soundness would jeopardize bank capital levels.

This argument was absurd at the time, most obviously because the existing regulators were simply awful. They totally failed to restrain predatory mortgage lending for nearly a full decade precisely because they considered "safety and soundess" regulation to be their only job. Safety and soundness was construed as "bank profitability"—if a bank had lots of money, it was less likely to fail. In practice, that meant regulators would allow consumer protection violations so long as they made money for the bank. With the mortgage crisis, this consumer protection failure ultimately lead to a safety and soundness catastrophe, but that's not actually very common. Usually predatory lending is very profitable, which is why banks do it.

So what happened after all the top regulators went out in public and repeatedly screamed that we absolutely can't allow them to lose their consumer protection authority? They totally ignored consumer protection regulation. Look at the excuse that bank regulators fed to the GAO (emphasis mine):

Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers’ foreclosure practices.

Translation: Even after consumer protection violations wrecked the largest banks in the country, we still don't look at consumer protection unless it actually hurts a bank's bottom line, right away, right now.

The amazing thing here is that the legal liabilities from these foreclosure abuses once again could be putting bank solvency on the line. Global economy to Elizabeth Warren: Help!

Also, the link above is to a summary of the GAO report. The full report is here.

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