Today’s Wall Street Journal describes how the Office of Thrift Supervision is weighing new rules that would bar the banks it supervises from engaging in “unfair and deceptive” practices, a response to widespread claims of “predatory lending” in the subprime mortgage market.
This effort, if it comes to fruition, is less and more than it seems. The OTS regulates only a small portion of the entities that originate housing loans, although residential mortgages are the most important product to those institutions. This new provision would be a rule, rather than a guideline,and because it is broadly worded, would cover all products (and credit cards are also important to these banks).
The OTS language could serve as a template for others who regulate mortgage lending. The big problem here has been that many different types of financial institutions have been involved in mortgage origination, which has allowed aggressive firms to seek out the least constraining way of organizing themselves. Not surprisingly, it has been mortgage brokerages, which until now have been lightly regulated by states, and wound up accounting for over 50% of subprime lending. While it’s unrealistic to expect various agencies to adopt identical language (for some reason we don’t do that in America), a broadly consistent philosophy and posture would be a big step forward.
There’s also a juicy tidbit in the story about how Congress is using heavy-handed tactics to get the Fed off the dime on this issue.
From the Wall Street Journal:
The federal regulator of thrifts is working on a proposal that could lead to a ban on lending practices the agency labels “unfair and deceptive,” several people briefed on the matter said.
If adopted, the proposal would be the most aggressive regulatory response this year aimed at tightening oversight of financial institutions, although it would cover just some of them.
Democrats in Congress have charged that federal bank regulators haven’t acted swiftly or strongly enough to curtail certain practices in the residential mortgage and credit card markets that they allege have led to high default rates and loaded consumers with debt.
Some of the practices under scrutiny could include prepayment penalties on adjustable-rate mortgages and higher interest-rate charges on one credit card if a borrower misses payments on a separate credit card.
The Office of Thrift Supervision, a division of the Treasury Department, has the authority to ban “unfair and deceptive” practices for the roughly 830 federally insured thrifts it regulates. The Federal Reserve has sole authority to issue bans on unfair and deceptive practices on the roughly 7,000 federally insured banks.
OTS Director John Reich had discussed using the authority for months, but decided to move ahead with the plan after a House Financial Services Committee hearing last month that focused on regulatory efforts related to consumer protection, according to a person familiar with the situation.
The OTS already has briefed Capitol Hill staff and banking-industry officials on the plan, which is in the preliminary stages and would first be released for public review and comment. The OTS hasn’t decided whether to use the new authority to prohibit specific practices or to more broadly issue principles that must be used by thrifts.
Its scrutiny could spread over multiple business lines. Federally regulated thrifts tend to specialize in residential mortgages, which means the agency could outlaw certain home-loan practices. But many of the OTS-regulated companies offer other products, such as credit cards. OTS-regulated companies held $1.49 trillion of assets during the first quarter.
Federal bank regulators issued guidelines last month that would discourage banks from certain high-risk lending practices, but the guidance doesn’t carry the weight that a formal rule would.
The Fed also is under pressure to use its authority to ban certain practices, using an authority it was given by the Federal Trade Commission Act. House Financial Services Committee Chairman Barney Frank (D., Mass.) said yesterday that he would give the Fed until this fall to use its powers in this area. If it doesn’t, he threatened legislation giving the Fed’s authority to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.