Joe Nocera has a very hopeful piece at the New York Times on the potential scope and impact of the investigation by all 50 state attorneys general into the robo signing scandal. Nocera stresses that the leader of this effort, Tom Miller of Iowa, and a core group of assistant AGs with long standing working relationships, are using the probe into what banks would have you believe are mere paperwork problems to delve into more serious abuses, with an eye to forcing the servicers to make serious loan modifications:
And best of all, they have a very clear idea of what they are trying to accomplish. They don’t want to merely reform the foreclosure system (though that would be nice, wouldn’t it?). Nor do they particularly want a big financial settlement, which would be meaningless for a giant like Bank of America.
Rather, they hope to use their investigation as a cudgel to force the big banks and servicers to do something they’ve long resisted: institute widespread, systematic loan modifications. “Instead of paying a huge fine,” Mr. Miller posited to me the other day, on his way to an election rally, “maybe have the servicers adequately fund a serious modification process.” Getting the banks and servicers to take loan modification seriously is another in a series of areas where the Obama Treasury Department has failed miserably.
Nocera recounts how some of the AGs were early onto abuses by subprime bank lenders, and mounted successful efforts against First Alliance (in 2002!), Household Financial, and Ameriquest.
But the story also describes how the state prosecutors were blocked from going after bigger banks:
During the bubble, it was the state attorneys general who first saw the problems in subprime lending. But whenever they tried to do something to halt the predatory lending and outright fraud, they were stopped cold by the federal bank regulators, who consistently sided with the banks in court. It is not too much to say that if the states had succeeded, the subprime crisis might never have occurred…..
On the contrary, the O.C.C. and the Office of Thrift Supervision, the two primary federal regulators of the banking industry, viewed their role, incredibly, as protecting banks from consumers rather than the other way around.
They consistently went to court to block efforts by states to put a stop to predatory lending. Their primary weapon was the doctrine of pre-emption, which said, in effect, that because the national banks were governed by federal rules, they were immune from state consumer protection laws. The success of both agencies in asserting pre-emption — which they also used as a marketing tool to make their charters more attractive to potential bank “clients” — actually forced some states to roll back their antipredatory lending laws.
Nocera also believes the passage of Dodd-Frank and the difference in national sentiment mean the AGs will have a clear field in which to operate:
One advantage they have this time is that foreclosure is a state matter, not a federal one. The O.C.C. couldn’t intervene even if it wanted to.
Of course they have another advantage this time around: times have changed. No federal regulator would have the nerve, post-financial crisis, to try to block the states from investigating the mortgage foreclosure scandal.
The law has changed too. As a result of the Dodd-Frank law, it will be much harder for a federal regulator to use pre-emption to shut down a state investigation into a financial institution. Under the new law, states can enforce their own state consumer laws against nationally chartered banks — even when those laws are stronger than any parallel federal law. And state attorneys general have been given the explicit right under the new law to enforce the rules and regulations that will soon emerge from the new Consumer Financial Protection Bureau.
Yves here. As much as I would like to believe this optimistic scenario, do not underestimate the banking industry’s ability to regain the upper hand, and from the public’s perspective, snatch defeat from the jaws of victory. While a bold move by the Ohio attorney general to stymie bank efforts to continue with business as usual in the wake of the robo signing scandal is a good early salvo, this battle has only recently been joined. Because the banks don’t yet appear to realize how much jeopardy they are in, they have not yet geared up for a serious fight.
One factor very much in the AGs favor is the degree of denial operative in the financial services industry and Washington. We’ve (and by this I mean me plus the mortgage and legal experts I confer with) have been gobsmacked by the lame defenses offered by securitization industry professionals, and more important, major law firms. They appear not to understand the nature of their clients’ transgressions; there remarks, when you parse them, amount to “The procedures were proper, what are you folks, idiots?”
But the issue, as we have described in gruesome detail, is the procedures set forth in the securitization documents were not followed, and it appears the lapses were significant and widespread. Now we’ve been told by some experts in close contact with investors that these white shoe law firms are so removed from what is happening in local courts, and have not been consulted by clients who really haven’t turned over the rocks in their own organization, that they are badly behind facts on the ground. While that may be true, there is a more cynical explanation: that investors relied on big firm opinions, which were crafted very narrowly (the form was “if everyone does what they committed to do, everything is swell). These attorneys are bound to come under the spotlight, and their emphasis on the soundness of the procedures, as opposed to what actually took place, is very consistent their likely “see no evil” defense.
The longer that bankers, their lawyers, and their lapdog regulators keep saying “nothing to see here”, the harder it will be for them to reverse gear and demand that Congress or Federal regulators intervene on their behalf. But don’t kid yourself that discussion of that possibility is not underway. I happened to chat with a staffer to a not-terribly-bank-friendly Senator about the foreclosure mess. He matter of factly said he though concerns were overblown (this was about a month ago, before additional shoes had dropped) but then volunteered that if anything serious were amiss, Congress would intercede, relying on pre-emption. Now does Congress have the nerve to trample on state law and run the risk of a Constitutional challenge? I suppose it depends on how high the stakes are perceived to be.
Similarly, we’ve had this worrying trail balloon:
The chairperson of the Federal Deposit Insurance Corporation recently suggested a solution to the on-going mortgage and foreclosures scandal. FDIC Chair Sheila Bair proposed that the banks involved would be granted “legal protection from lawsuits” in exchange for granting struggling homeowners a minimum of 25 percent reduction in monthly mortgage payments.
First, the idea of a broad based exemption from liability is heinous and undermines the operation of a capitalist society. What good are contracts if you can mess up on a grand enough scale so as to receive a Federal waiver? Second, mere payment reductions are inadequate, and serve to protect servicers, whose fees are based on unpaid principal balances. Most investors favor principal mods to viable borrowers because their losses are lower than what they experience through the costs of foreclosure and the process of selling the home (there would need to be disciplined processes for verifying income and putting together household budget information; NACA has a process that could be adapted to this purpose). And remember, many borrowers losing their homes now were not profligate borrowers, but normal credit losses, as in individuals suffering from job losses or cutbacks in hours worked, as well as those on the wrong end of servicing errors.
So I’d be delighted to be wrong and see Nocera’s scenario pan out, but state attorneys general have been hemmed in before. If the foreclosure mess turns out to be as serious as we believe, the banks will push Congress and its friendly regulators hard to call off those nasty state AGs. This saga has a long way to run before anyone can start forecasting outcomes.