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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

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to pay, and required companies to verify income and assets. The rules would not take
effect until October , , which was too little, too late.
Looking back, Fed General Counsel Alvarez said his institution succumbed to the
climate of the times. He told the FCIC, “The mind-set was that there should be no
regulation; the market should take care of policing, unless there already is an identi-
fied problem. . . . We were in the reactive mode because that’s what the mind-set was
of the ‘s and the early s.” The strong housing market also reassured people. Al-
varez noted the long history of low mortgage default rates and the desire to help
people who traditionally had few dealings with banks become homeowners. 

STATES: “LONGSTANDING POSITION”
As the Fed balked, many states proceeded on their own, enacting “mini-HOEPA”
laws and undertaking vigorous enforcement. They would face opposition from two
federal regulators, the OCC and the OTS.
In , North Carolina led the way, establishing a fee trigger of : that is, for
the most part any mortgage with points and fees at origination of more than  of
the loan qualified as “high-cost mortgage” subject to state regulations. This was con-
siderably lower than the  set by the Fed’s  HOEPA regulations. Other provi-
sions addressed an even broader class of loans, banning prepayment penalties for
mortgage loans under , and prohibiting repeated refinancing, known as loan
“flipping.” 
These rules did not apply to federally chartered thrifts. In , the Office of
Thrift Supervision reasserted its “long-standing position” that its regulations “occupy
the entire field of lending regulation for federal savings associations, leaving no room
for state regulation.” Exempting states from “a hodgepodge of conflicting and over-
lapping state lending requirements,” the OTS said, would let thrifts deliver “low-cost
credit to the public free from undue regulatory duplication and burden.” Meanwhile,
“the elaborate network of federal borrower-protection statutes” would protect
consumers. 
Nevertheless, other states copied North Carolina’s tactic. State attorneys general
launched thousands of enforcement actions, including more than , in 

alone. By ,  states and the District of Columbia would pass some form of
anti-predatory lending legislation. In some cases, two or more states teamed up to
produce large settlements: in , for example, a suit by Illinois, Massachusetts, and
Minnesota recovered more than  million from First Alliance Mortgage Company,
even though the firm had filed for bankruptcy. Also that year, Household Finance—
later acquired by HSBC—was ordered to pay  million in penalties and restitu-
tion to consumers. In , a coalition of  states and the District of Columbia
settled with Ameriquest for  million and required the company to follow restric-
tions on its lending practices.
As we will see, however, these efforts would be severely hindered with respect to
national banks when the OCC in  officially joined the OTS in constraining states