Max Frumes/MNS
Top: John Hawke, former comptroller of the OCC. John Dugan, current comptroller of the OCC.
WASHINGTON – Pre-emption of state laws against predatory lending was not a major cause of the financial crisis, according to testimony on Thursday by current and former federal bank regulators.
A congressional commission charged with investigating the roots of the crisis clashed with the bank regulators on Thursday.
“You tied the hands of the states and then you sat on your hands,” said Phil Angelides, the chair of the Financial Crisis Inquiry Commission.
Not so, said John Dugan, head of the Office of the Comptroller of the Currency. “The weak lending standards [of the states] were not the result of pre-emption.”
As the housing bubble inflated early in the last decade, the OCC fought efforts by states to enforce predatory lending laws, insisting that nationally chartered banks should be subject to national laws, not 50 separate state standards.
“There is a great value in being able to have a common set of standards that apply regardless of the state in which you operate,” Dugan said.
John Hawke, Dugan’s predecessor at the OCC, said in his testimony that pre-emption was a constitutional doctrine that arose from the 19th century.
“If one reads the criticisms of the OCC with respect to pre-emption, one would think we invented the doctrine in recent years solely as a means to curry favor with national banks,” Hawke said. “The reality is quite different.”
In his testimony, Dugan said national banks and their subsidiaries originated just 12 percent to 14 percent of all subprime mortgages between 2005 and 2007. The non-prime loans originated by the banks have also performed better, with a 22 percent delinquency rate, vs. 25 percent for non-banks.
These “are hard facts that belie the argument that national banks’ federal pre-emption caused the mortgage crisis,” Dugan said.
His solution is that the government establish minimum underwriting standards for mortgages that apply everywhere.
“If we would have had these [standards] 10 years ago, I believe the financial crisis would have been much less severe,” Dugan said.
Members of the 10-person commission, made up of six Democrats and four Republicans, asked Dugan and Hawke whether the federal regulations in place before the crisis were enough. Hawke and Dugan, for the most part, said that they were, with a few notable exceptions.
“The stated-income mortgages, the low-doc mortgage area, was a place something where we just lost our way,” Dugan said. “It’s something that not only was wrong in and of itself, but it was an invitation to fraud.”
Financial regulatory reform legislation making its way through Congress puts in place a strong federal agency to write rules to protect consumers, something Dugan supports.
The OCC regulates the 1,565 national banks, including giants like Citigroup Inc. Citi executives were on the hot seat in earlier sessions trying to account for why Citi needed a $45 billion bailout as well as a $306 billion guarantee for loans backed by residential mortgage securities.