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more broadly available.” Instead, at least for certain violations of consumer protec-
tion laws, he suggested another approach: “If there is egregious fraud, if there is egre-
gious practice, one doesn’t need supervision and regulation, what one needs is law
enforcement.” But the Federal Reserve would not use the legal system to rein in
predatory lenders. From to the end of Greenspan’s tenure in , the Fed re-
ferred to the Justice Department only three institutions for fair lending violations re-
lated to mortgages: First American Bank, in Carpentersville, Illinois; Desert
Community Bank, in Victorville, California; and the New York branch of Société
Générale, a large French bank.
Fed officials rejected the staff proposals. After some wrangling, in December
the Fed did modify HOEPA, but only at the margins. Explaining its actions, the
board highlighted compromise: “The final rule is intended to curb unfair or abusive
lending practices without unduly interfering with the flow of credit, creating unnec-
essary creditor burden, or narrowing consumers’ options in legitimate transactions.”
The status quo would change little. Fed economists had estimated the percentage of
subprime loans covered by HOEPA would increase from to as much as un-
der the new regulations. But lenders changed the terms of mortgages to avoid the
new rules’ revised interest rate and fee triggers. By late , it was clear that the new
regulations would end up covering only about of subprime loans. Nevertheless,
reflecting on the Federal Reserve’s efforts, Greenspan contended in an FCIC inter-
view that the Fed had developed a set of rules that have held up to this day.
This was a missed opportunity, says FDIC Chairman Sheila Bair, who described
the “one bullet” that might have prevented the financial crisis: “I absolutely would
have been over at the Fed writing rules, prescribing mortgage lending standards
across the board for everybody, bank and nonbank, that you cannot make a mortgage
unless you have documented income that the borrower can repay the loan.”
The Fed held back on enforcement and supervision, too. While discussing
HOEPA rule changes in , the staff of the Fed’s Division of Consumer and Com-
munity Affairs also proposed a pilot program to examine lending practices at bank
holding companies’ nonbank subsidiaries, such as CitiFinancial and HSBC Finance,
whose influence in the subprime market was growing. The nonbank subsidiaries
were subject to enforcement actions by the Federal Trade Commission, while the
banks and thrifts were overseen by their primary regulators. As the holding company
regulator, the Fed had the authority to examine nonbank subsidiaries for “compliance
with the [Bank Holding Company Act] or any other Federal law that the Board has
specific jurisdiction to enforce”; however, the consumer protection laws did not ex-
plicitly give the Fed enforcement authority in this area.
The Fed resisted routine examinations of these companies, and despite the sup-
port of Fed Governor Gramlich, the initiative stalled. Sandra Braunstein, then a staff
member in the Fed’s Consumer and Community Affairs Division and now its direc-
tor, told the FCIC that Greenspan and other officials were concerned that routinely
examining the nonbank subsidiaries could create an uneven playing field because the
subsidiaries had to compete with the independent mortgage companies, over which
