All the Devils Are Here [92]
So it was left to local officials to try and stop the abuses. And try they did. But at every level, those who took on the lending machine found themselves stymied by lender lobbying and federal bank regulators who actively—and successfully—sought to thwart local officials. It would be hard to imagine a more telling example of how the nation’s bank regulators had become captive to the institutions they were charged with regulating.
Take Cleveland, which had been hit hard by the first subprime bubble and feared the consequences of a second bubble. In 2001, the city council passed a law banning balloon payments and mandating counseling for borrowers who were seeking certain loans. The law also required lenders to submit key information, including the total points and fees paid on each loan. In response, the Ohio state legislature, which was controlled by Republicans, passed its own, much meeker law, saying that only the state had the right to regulate lending. Mortgage lobbyists proudly acknowledged that they had largely written the state’s bill. Then a group of lenders called the American Financial Services Association sued Cleveland, arguing that the city’s law was now illegal. A court ruled in favor of the AFSA in 2003; Cleveland’s law was overturned.
That same story played out in Oakland, Los Angeles, and elsewhere. Communities tried to strengthen state laws that had been watered down by lender lobbying, only to face lawsuits from the AFSA. The AFSA dubbed this its “municipal litigation” program; in most of these battles, the AFSA’s most public spokesman was its Ameriquest representative. From 2002 to 2006 Ameriquest, its executives, and their spouses and business associates donated at least $20.5 million to state and federal political groups, according to the Wall Street Journal.
States that wanted to do something about subprime lending didn’t fare much better. In the fall of 2002, Georgia governor Roy Barnes, a Democrat, signed into law the Georgia Fair Lending Act, which prohibited loans from being made without regard for the borrower’s ability to repay. It also provided “assignee liability,” meaning that the investment bank that securitized the loans—and the investors who wound up owning the mortgage—could both be sued if the loan violated the law. The outcry was instantaneous. Mozilo called the new law “egregious.” Ameriquest said that it could no longer do business in Georgia. A group of Atlanta lenders filed a class action lawsuit. The rating agencies jumped in on the side of the bankers, with S&P and Moody’s both saying they would no longer rate bonds backed by loans that were originated in Georgia.
But the most crushing blow came from the national regulators—especially the Office of Thrift Supervision and the OCC, which oversaw roughly two-thirds of the assets in national banks. Siding with the banks against the states and cities that were trying to stop abusive lending, the two federal regulators asserted something called preemption. What that meant, in effect, was that institutions that were regulated by the OTS or the OCC were immune from state or local laws. In theory, preemption makes sense—companies always want to be able to play by one set of rules, instead of having to adapt to fifty different laws in fifty different states. Federal preemption basically says that federal rules always take precedence over state rules.
But in this case, there was no meaningful federal rule. “[N]either of these federal agencies replaced the preempted state laws with comparable, binding consumer protection regulations of their own,” wrote Patricia McCoy, the director of the University of Connecticut’s Insurance Law Center, in 2008. And the preemption doctrine was never intended to give banks free rein to make abusive