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Triumph for Federal Inaction

posted by Katie Porter

The Supreme Court issued its opinion today in Watters v. Wachovia Bank. The 5-3 decision (Thomas did not participate) affirmed the Sixth Circuit's decision that a mortgage lending subsidiary of Wachovia Bank is subject to regulation by the Office of the Comptroller of the Currency under the National Banking Act and is not required to comply with the licensing and reporting regime of the state of Michigan in which it operated. Writing for the majority, Justice Ginsburg held that federal law preempted two Michigan statutes that purported to regulate mortgage lenders, including national bank operating subsidiaries. The statutes at issue did not regulate depository institutions such as national or state banks and had consumer protection (rather than protection of bank depositors) as their purpose. 

The dissent was authored by Justice Stevens and joined by the Chief Justice and Justice Scalia, a rather odd group of bedfellows.  In Part V, Justice Stevens identifies as the most pressing question whether "Congress has delegated to the Comptroller of the Currency the authority to preempt the laws of a sovereign State as they apply to operating subsidiaries, and if so, whether that authority was properly exercised here." Justice Stevens concludes that it is inappropriate to grant Chevron deference to a federal agency's own decision about the scope of its premptive powers, which he concludes is the thrust of the majority's analysis. The majority decision, however, studiously avoids relying on Chevron. Perhaps the failure to rely on Chevron permits a narrowing reading of the decision that it holds only that state licensing is preempted by the National Banking Act but that substantive regulation remains open to state action unless expressly preempted by a federal statute.  

On the other hand, the decision may deter or prohibit state and local authorities who have developed and implemented a variety of innovative responses to non-traditional mortgage products and the risks of subprime mortgage lending. Shackling state regulators and relying on the OCC to supervise mortgage lending restrains localities from responding to particular concerns in their jurisdictions. Recently, Congress has called federal regulators to task for their failure to monitor the subprime market. While Watters looks like a victory for federal regulators, the decision may fuel Congress' scrutiny of the actual job that federal regulators have done in recent years.   


You lost me when you opine: "the decision may deter or prohibit state and local authorities who have developed and implemented a variety of innovative responses to non-traditional mortgage products and the risks of subprime mortgage lending."
The CSBS site (see below) reflects that 17 states have yet to sign on to CSBS version of FED non-traditional guidance a full FIVE MONTHS after it was issued. Among the holdouts are our principal bubble states, CA, FLA, N.Y., & NV.
It took the various FED regulatory agencies a VERY long time to issue what I consider a pretty whimpy guidance. The bubble states' reluctance to sign on to it argues strongly that many states are reluctant to demand minimal societal benefit of the r.e. industry, even when the evidence for needed change is overwhelming.

Thanks for the comment. I wonder why some states are resisting the federal regulators guidance on non-traditional mortgages. As you point out, it is pretty "whimpy." While some states (Nevada) do not traditionally have strong consumer protection, that is certainly not true in others (such as California or New York). I wonder if there is fear that signing onto the guidance will tighten credit right at the moment when many families need and want to refinance out of unfavorable loans? I'm not making this argument; I'm speculating whether it is behind the states' motivations. Despite these 17 states' reluctance, the Center for Responsible Lending says that 24 states have specific anti-predatory lending mortgage laws that exceed federal requirements. They have a nice chart on their website showing these laws. http://www.responsiblelending.org/issues/mortgage/reports/page.jsp?itemID=28546805

My guess is the r.e. lobbies, in CA at least, are very powerful & are trying to get through one more year before the bubble pops.
So many were enticed by "funny money" loans into carrying costs they just can't afford it's become a societal dilemma. Obviously, they'd love to refinance under the initial terms they were duped with. But, who's going to subsidize their bad decisions to make that possible? (Remember, 100+% at low teaser rate loans requiring NO earnings history.) THESE loans caused home prices to triple in many bubble states, not low int. rates.
I think the choice IS simple. If we further assist homeowners (they're already getting a tax break), there will be an enormous societal cost. Doing so will act to support absurdly inflated prices & make it impossible for an entire generation to buy into the American dream. (Wages have barely moved in that 10 year period.) Is that decision in our country's best interest?
At some point we're going to have to put an end to the outrageous monetary mismanagement we've witnessed at every level for the last six years & take our medicine. It's as simple as that.
It's unfortunate that those who can least afford it will be the first to be hurt. But, let's be clear - we elected & reelected the Administration who's led the farsically short-sighted policies responsible for the mess we're in. I wonder how many of those now pleading for help voted & revoted for GW or didn't vote at all.

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