The Need for Enforcement

This blog has given lots of attention to the current push to enact new laws to curb predatory lending of all types. It is also useful to recognize that much of the abusive lending in recent years was made possible because regulators failed to use their existing powers. At a March 3 Senate Banking Committee hearing on “Consumer Protections in Financial Services,” two witnesses provided powerful and eloquent reminders of this important point.

Professor Pat McCoy of the the UConn Law School noted that the federal banking regulators “had ample power to stop the deterioration in mortgage underwriting standards that mushroomed into a full-fledged crisis,” and offered a chapter and verse summary of the case for this conclusion.

Ellen Seidman, of the New America Foundation and ShoreBank, also emphasized the extent to which lack of effective enforcement — rather than lack of regulatory authority — was fundamental in getting us to where we are today. She contrasted her own efforts as head of the Office of Thrift Supervision (OTS, one of the four federal bank regulators) from 1997-2001 with the extreme hands-off policies adopted by that regulator after the Bush administration came to power. She made a compelling case that “enforcement is at least as important as writing the rules.”

But don’t take her word for it. For a devastating, highly readable account of the abject failure of the OTS as a bank regulator during the Bush years, see The Second S&L Scandal: How OTS Allowed Reckless and Unfair Lending to Fleece Homeowners and Cripple the Nation’s Savings and Loan Industry, a report by Michael Hudson and Jim Overton that was released in January by the Center for Responsible Lending.