It’s much more fashionable these days to talk about abolishing the police, but there are nefarious actors on the finance front who are still doing harm to the welfare of ordinary citizens. One is the Office of the Controller of the Currency, or the OCC, which regulates nation banks and Federal savings associations. It has the weird half-pregnant status of being an independent branch of the Treasury. The OCC has become not just hopelessly captured, but also so impregnable to reform that as we’ll see below, Georgetown law professor Adam Levitin, who was special counsel to the Congressional Oversight Panel and later a significant force in fighting foreclosure and servicing abuses, is calling for its abolition.
Admittedly, Levitin is amplifying an article in March by Carter Dougherty at Washington Monthly, Abolish the Comptroller of the Currency. The trigger for Levitin’s post is a new offense by the OCC. Levitin walks through how the OCC is lobbying to defend its Orwellianly-named “True Lender” rule, by defending sham transactions that allow banks to evade state usury laws….even though the Supreme Court and many state supreme courts have held that substance, and not form, is what dictates the application of usury laws.
For a Beltway insider like Levitin to join the calls to shutter the OCC says that the stench of corruption at the OCC has become too noisome to perfume away.
We’ll give a bit of sorry history via our introduction to a 2014 cross post from Bill Black, OCC as Case Study of How Regulators Decide to Fail:
The OCC, despite being less visible to the general public than the Fed, Treasury, and the FDIC, played an important role in deregulation, specifically, the notion of pre-emption, which allowed OCC regulated “national” banks to ignore state banking rules. The OCC was also the evil genius behind the get-out-of-jail-almost-free card of the 2011 servicing consent orders. The consent orders mandated what was meant to be an exercise in compliance theater, the Independent Foreclosure Reviews. Unfortunately, it was badly enough thought out that it served as a ginormous fee-generating exercise for not-really-that-independent consultants while failing both to understand how bad the borrower abuses were and providing capricious, inadequate compensation to wronged homeowners.
A new Comptroller, Tom Curry, took the helm when the Independent Foreclosure Review embarrassment, which he inherited, was major news. Curry gets high marks from insiders as being serious about wanting to reform the OCC. He took some decisive steps early on, forcing out its dreadful, long-standing bank stooge Chief Counsel, Julie Williams, and was widely believed to have demoted another bank-friendly senior staffer (it was dressed up as a voluntary reassignment).
But Curry’s big challenge was reforming the bank’s badly captured examination staff. As readers will see, Bill Black gives Curry a failing grade for the approach he’s choosing to implement. Black pins the badly-conceived plan on the choice of a failed regulator as designer of the new program. I haven’t sussed out why Curry made this choice, as in whether he was pressured or this was bad judgment on this part.
I’m highlighting this post for a basic reason: there’s a lot of cynicism about regulation. Many Americans have bought the right-wing line that regulations can’t work. But here, whether by accident or design, a reform plan is going off the rails due to bad strategic choices. By all accounts, Curry at least at one point was deadly serious about taking on the badly captured OCC examination staff. I’d be curious to get informed intelligence as to why events have taken this turn.
Back to the present post. I hate to shamelessly toot the Naked Capitalism horn, but it was this humble site that blew open the cover-ups and falsifications in an extensive series based on detailed whistleblower accounts and documents. See Bank of America Foreclosure Reviews: Whistleblowers Reveal Extensive Borrower Harm and Orchestrated Coverup (Part I – Executive Summary) and for your further delectation, Bank of America Foreclosure Reviews: Why the OCC Overlooked “Independent” Reviewer Promontory’s Keystone Cops Act (Part VB).
Bill Black patiently and brutally took apart the report by Jonathan Fiechter. This vignette alone speaks volumes:
Fiechter’s report describes a disaster waiting to happen – and prescribes responses that will make it worse. While the article describes Fiechter as “a former OCC official,” his claim to infamy is as acting director (from late 1992- mid-1996) that did so much to ruin the OTS and set the stage for the most recent crisis. (Think about the implications of that for a moment: President Clinton left an “acting” director that he inherited from President Bush in charge of a federal agency for four years – and then replaced him with a part-time director.) Fiechter was an avid supporter of the “Reinventing Government” crusade during the Clinton-Gore administration that gutted the FDIC and the OTS. The FDIC lost over three-quarters of its staff and the OTS over half its staff. The gravest damage, however, was Fiechter’s elimination of the vital loan underwriting rule that we had used to drive liar’s loans out of the S&L industry in 1990-1991 and his embrace of the regulatory “race to the bottom” in which OTS attempted to have weaker rules than the banking regulators.
The Fiechter “study” made only the barest pretense of being a study. For example, “the on-site work of the team … took place from October 28 to November 5, 2013…. The nature of the exercise did not permit an in-depth analysis of any particular areas.” Yes, an entire week and not a single area considered “in-depth.” OK, but they could have used their time when they were not “on-site” at the OCC to read the key OCC documents. Except, they didn’t do that: “The team did not review the extensive set of OCC supervisory handbooks and supervisory guidance.” Oh, and their “on-site” visit consisted largely of reading documents selected by the OCC for their review. There was no pretense that Fiechter was conducting an independent review.
While Black describes many failings at the OCC, one stands out: they heavy use of resident examiners who live at the banks they nominally supervise. These examiners rapidly develop much closer personal relationships with the bank employees they see every day than their bosses and colleagues at the OCC. Black argued that an obvious reform would be to greatly reduce the number of resident examiners and increase the number of visiting examiners with expertise in various supervisory issues.
Seven years later, and Levitin is calling for the abolition of the OCC because he sees the regulator’s front line staff as so deeply captured by banks as to be immune to reform. You’d have to get rid of most of the rank and file and start over. Levitin also describes how the OCC is not an essential regulator and its continued existence appears solely to preserve various types of regulatory arbitrage, some of which are remarkably blatant.
…Carter Dougherty published a carefully researched article calling for the abolition of the Office of the Comptroller of the Currency. He argued that the OCC was too friendly with the industry it regulated and as a result it was frequently failing to do its job.
Abolishing a federal agency is an extreme step, but I think in this case it really needs to be given serious consideration. For starters, the dual banking system is a chimera—part lion, part goat, part snake—that no one would ever design from scratch….
Obviously, a first step is putting in place a good Senate-confirmed Comptroller. But I’m increasingly skeptical that such reform can be achieved simply with the right person heading the agency. The real problem with the agency isn’t about who is its head, but the fundamental outlook of many of the civil servants in the front-office. It’s not a partisan issue, but a capture problem: too many of the OCC’s front office career employees truly believe that the OCC is supposed to advocate for banks rather than regulate them in the public’s interest.
The proof of this is Tom Curry’s tenure as Comptroller. Curry was on the right side of policy issues, but he did not have the ability to fight the staff regarding a repeal of the OCC’s patently illegal 2011 preemption regulations….I’m skeptical that it will be possible to overcome the intellectual capture of the career front office employees. That’s why I think Carter Dougherty’s right and abolishing the OCC—and ending the dual banking system—should start to get serious policy consideration.
If this seems drastic, consider what an anomaly the OCC is. It exists because there is federal chartering of banks. The federal government is not generally in the business of giving out corporate charters…
The federal government got into the bank chartering business as a way of financing the Civil War: national banks were given the privilege of issuing national bank notes, which were legal tender currency accepted by the federal government for taxes (and used for paying government obligations), but they could only issue those notes in proportion to their holdings of government debt. In other words, the national banking system was created to monetize the federal debt. In that sense, the national banking system was very much a federal instrumentality and fell squarely within Congress’s “necessary and proper” power under M’Culloch v. Maryland. National banks, however, haven’t issued notes since 1935. They are no longer tools for monetizing the federal debt. Today it is hard to see how national banking charters fall within “necessary and proper.” National banks no longer serve any federal purpose. They are not federal instrumentalities in any sense, and it’s been decades since the Supreme Court has referred to them as such. All of which is to say that besides the policy desirability of having a separate national bank charter, I think it is of dubious constitutionality.
Let’s hope this campaign gets more steam. It would be nice to see at least one bad actor removed from the stage.