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BEFORE OUR VERY EYES
wild, taking applications over the Internet, not verifying peoples’ income or their
ability to have a job,” recalled Alphonso Jackson, the HUD secretary from to
, in an interview with the Commission. “Everybody was making a great deal of
money . . . and there wasn’t a great deal of oversight going on.” Although he was the
nation’s top housing official at the time, he placed much of the blame on Congress.
Cox, the former Minnesota prosecutor, and Madigan, the Illinois attorney gen-
eral, told the Commission that one of the single biggest obstacles to effective state
regulation of unfair lending came from the federal government, particularly the Of-
fice of the Comptroller of the Currency (OCC), which regulated nationally chartered
banks—including Bank of America, Citibank, and Wachovia—and the OTS, which
regulated nationally chartered thrifts. The OCC and OTS issued rules preempting
states from enforcing rules against national banks and thrifts. Cox recalled that in
, Julie Williams, the chief counsel of the OCC, had delivered what he called a
“lecture” to the states’ attorneys general, in a meeting in Washington, warning them
that the OCC would “quash” them if they persisted in attempting to control the con-
sumer practices of nationally regulated institutions.
Two former OCC comptrollers, John Hawke and John Dugan, told the Commis-
sion that they were defending the agency’s constitutional obligation to block state ef-
forts to impinge on federally created entities. Because state-chartered lenders had
more lending problems, they said, the states should have been focusing there rather
than looking to involve themselves in federally chartered institutions, an arena where
they had no jurisdiction. However, Madigan told the Commission that national
banks funded of the largest subprime loan issuers operating with state charters,
and that those banks were the end market for abusive loans originated by the state-
chartered firms. She noted that the OCC was “particularly zealous in its efforts to
thwart state authority over national lenders, and lax in its efforts to protect con-
sumers from the coming crisis.”
Many states nevertheless pushed ahead in enforcing their own lending regula-
tions, as did some cities. In , Charlotte, North Carolina–based Wachovia Bank
told state regulators that it would not abide by state laws, because it was a national
bank and fell under the supervision of the OCC. Michigan protested Wachovia’s an-
nouncement, and Wachovia sued Michigan. The OCC, the American Bankers Asso-
ciation, and the Mortgage Bankers Association entered the fray on Wachovia’s side;
the other states, Puerto Rico, and the District of Columbia aligned themselves
with Michigan. The legal battle lasted four years. The Supreme Court ruled – in
Wachovia’s favor on April , , leaving the OCC its sole regulator for mortgage
lending. Cox criticized the federal government: “Not only were they negligent, they
were aggressive players attempting to stop any enforcement action[s]. . . . Those guys
should have been on our side.”
Nonprime lending surged to billion in and then . trillion in ,
and its impact began to be felt in more and more places. Many of those loans were
funneled into the pipeline by mortgage brokers—the link between borrowers and
the lenders who financed the mortgages—who prepared the paperwork for loans
and earned fees from lenders for doing it. More than , new mortgage brokers
