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CREDIT EXPANSION
the Fed had no supervisory authority (although the Fed’s HOEPA rules applied to all
lenders). In an interview with the FCIC, Greenspan went further, arguing that with
or without a mandate, the Fed lacked sufficient resources to examine the nonbank
subsidiaries. Worse, the former chairman said, inadequate regulation sends a mis-
leading message to the firms and the market; if you examine an organization incom-
pletely, it tends to put a sign in their window that it was examined by the Fed, and
partial supervision is dangerous because it creates a Good Housekeeping stamp.
But if resources were the issue, the Fed chairman could have argued for more. The
Fed draws income from interest on the Treasury bonds it owns, so it did not have to
ask Congress for appropriations. It was always mindful, however, that it could be sub-
ject to a government audit of its finances.
In the same FCIC interview, Greenspan recalled that he sat in countless meetings
on consumer protection, but that he couldn’t pretend to have the kind of expertise on
this subject that the staff had.
Gramlich, who chaired the Fed’s consumer subcommittee, favored tighter super-
vision of all subprime lenders—including units of banks, thrifts, bank holding com-
panies, and state-chartered mortgage companies. He acknowledged that because
such oversight would extend Fed authority to firms (such as independent mortgage
companies) whose lending practices were not subject to routine supervision, the
change would require congressional legislation “and might antagonize the states.” But
without such oversight, the mortgage business was “like a city with a murder law, but
no cops on the beat.” In an interview in , Gramlich told the Wall Street Journal
that he privately urged Greenspan to clamp down on predatory lending. Greenspan
demurred and, lacking support on the board, Gramlich backed away. Gramlich told
the Journal, “He was opposed to it, so I did not really pursue it.” (Gramlich died in
of leukemia, at age .)
The Fed’s failure to stop predatory practices infuriated consumer advocates and
some members of Congress. Critics charged that accounts of abuses were brushed off
as anecdotal. Patricia McCoy, a law professor at the University of Connecticut who
served on the Fed’s Consumer Advisory Council between and , was famil-
iar with the Fed’s reaction to stories of individual consumers. “That is classic Fed
mindset,” said McCoy. “If you cannot prove that it is a broad-based problem that
threatens systemic consequences, then you will be dismissed.” It frustrated Margot
Saunders of the National Consumer Law Center: “I stood up at a Fed meeting in
and said, ‘How many anecdotes makes it real? . . . How many tens [of] thousands of
anecdotes will it take to convince you that this is a trend?’”
The Fed’s reluctance to take action trumped the HUD-Treasury report and
reports issued by the General Accounting Office in and . The Fed did not
begin routinely examining subprime subsidiaries until a pilot program in July ,
under new chairman Ben Bernanke. The Fed did not issue new rules under HOEPA
until July , a year after the subprime market had shut down. These rules banned
deceptive practices in a much broader category of “higher-priced mortgage loans”;
moreover, they prohibited making those loans without regard to the borrower’s ability
