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BEFORE OUR VERY EYES
The OCC was also pondering the situation. Former comptroller of the currency
John C. Dugan told the Commission that the push had come from below, from bank
examiners who had become concerned about what they were seeing in the field.
The agency began to consider issuing “guidance,” a kind of nonbinding official
warning to banks, that nontraditional loans could jeopardize safety and soundness
and would invite scrutiny by bank examiners. Siddique said the OCC led the effort,
which became a multiagency initiative.
Bies said that deliberations over the potential guidance also stirred debate within
the Fed, because some critics feared it both would stifle the financial innovation that
was bringing record profits to Wall Street and the banks and would make homes less
affordable. Moreover, all the agencies—the Fed, the OCC, the OTS, the FDIC, and
the National Credit Union Administration—would need to work together on it, or it
would unfairly block one group of lenders from issuing types of loans that were avail-
able from other lenders. The American Bankers Association and Mortgage Bankers
Association opposed it as regulatory overreach.
“The bankers pushed back,” Bies told the Commission. “The members of Con-
gress pushed back. Some of our internal people at the Fed pushed back.”
The Mortgage Insurance Companies of America, which represents mortgage in-
surance companies, weighed in on the other side. “We are deeply concerned about
the contagion effect from poorly underwritten or unsuitable mortgages and home
equity loans,” the trade association wrote to regulators in . “The most recent
market trends show alarming signs of undue risk-taking that puts both lenders and
consumers at risk.”
In congressional testimony about a month later, William A. Simpson, the group’s
vice president, pointedly referred to past real estate downturns. “We take a conserva-
tive position on risk because of our first loss position,” Simpson informed the Senate
Subcommittee on Housing, Transportation and Community Development and the
Senate Subcommittee on Economic Policy. “However, we also have a historical per-
spective. We were there when the mortgage markets turned sharply down during the
mid-s especially in the oil patch and the early s in California and the
Northeast.”
Within the Fed, the debate grew heated and emotional, Siddique recalled. “It got
very personal,” he told the Commission. The ideological turf war lasted more than a
year, while the number of nontraditional loans kept growing and growing.
Consumer advocates kept up the heat. In a Fed Consumer Advisory Council
meeting in March , Fed Governors Bernanke, Mark Olson, and Kevin Warsh
were specifically and publicly warned of dangers that nontraditional loans posed to
the economy. Stella Adams, the executive director of the North Carolina Fair Hous-
ing Center, raised concerns that nontraditional lending “may precipitate a downward
spiral that starts on the coast and then creates panic in the east that could have impli-
cations on our total economy as well.”
At the next meeting of the Fed’s Consumer Advisory Council, held in June
and attended by Bernanke, Bies, Olson, and Warsh, several consumer advocates de-
scribed to the Fed governors alarming incidents that were now occurring all over the
