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Originally Published: 3/19/2008


By The Issue Wonk


In light of the bailout of Bear Stearns by the Federal Reserve, I wondered who was supposed to be watching banks and financial institutions. It turns out it’s the U.S. Department of the Treasury, the Office of the Comptroller of the Currency (OCC). According to its website, it “charters, regulates, and supervises all national banks. It also supervises the federal branches and agencies of foreign banks.” It is, of course, headquartered in Washington, D.C., but has four district offices plus an office in London “to supervise the international activities of national banks.”


Founded in 1863, it is headed by the Comptroller who is appointed by the President, with the advice and consent of the Senate, for a 5-year term. The Comptroller also serves as a director of the Federal Deposit Insurance Corporation (FDIC), the Federal Financial Institutions Examination Council (FFIEC)1, and NeighborWorks® America.


The current Comptroller is John C. Dugan, who took office in August 2005. Prior to Mr. Dugan, the Comptroller was John D. Hawke, Jr., who served in this position from 1998 to 2004.


The OCC came under fire when, in 2001, it determined that the states had no right to regulate consumer protections against national banks. It determined that only the OCC had that right. It also determined that the states could not prosecute or impose penalties against national banks for violation of federal laws, which had, up until that time, been allowed. State legislatures, attorneys general, and governors joined with consumer advocates and community and civil rights groups to fight the decision.


If the OCC action is not overturned by Congress, predatory mortgage lending will increase, more banks will get involved in shabby payday loan-like “bounce protection” scams, credit card companies will intensify their unfair practices and bank fees will rise even more astronomically.2


The decision was affirmed in 2007 by the U.S. Supreme Court. A case was brought by Wachovia Bank against the Michigan bank regulator, stating that Michigan had no right to regulate its mortgage lending division. Supporting the state’s decision and joining in the suit were all 50 states plus several consumer groups. They argued that “a decision upholding the federal agency’s claimed power of pre-emption would displace state oversight at a time when the mortgage lending industry urgently needed close supervision.”3


This appears to be an end-run around Congress. By forbidding the states to enforce its own regulations, and by refusing to enforce them on the federal level, it amounted to de facto de-regulation.


Also, it appears that, in 2004, the OCC, FDIC, Federal Reserve, and Office of Thrift Supervision, were considering a proposal “to change and clarify the reporting requirements for certain securitized loans (see The Weekly Wonk, Securitization, 3/15/08) that are 90 days past due and subject to seller buyback provisions under the Government National Mortgage Association (GNMA) Mortgage-Backed Securities Program.” William Gonska, Deputy Controller of Citigroup, sent a letter to these offices, stating that while it agreed that delinquency loans should be carried on the issuer’s books, “we do not support the inclusion of these assets in the body of the Past Due and Nonaccrual Schedule if the process for reimbursement is proceeding normally. Additionally, we do not support [your] proposal to classify these loans as Other Real Estate Owned, ‘OREO.’”


Gonska’s letter goes on to explain, “Under the GNMA program, any losses on defaulted loans underlying GNMA securities are borne by the FHA and VA, not the issuer.” Therefore, Citigroup balked are recording these defaulted loans as defaulted loans because they were insured by the federal government. “The inclusion of properties acquired and held by Citigroup under the GNMA buyout program would misrepresent the inherent risks of this particular asset class, given the guarantee received under the [GNMA] program.”


In other words, defaulted loans under GNMA were not carried on the books as defaulted loans because we taxpayers were going to pay for them. So, when the assets were bundled for sale, did the purchasers know how many of the loans were already in default? And, this just applies to the GNMA loans. What about other loans? When they were bundled for sale did the lending institution have to disclose their accounting records on these assets? I was unable to determine any of this and if anyone out there has any information I’d be very glad to hear it.


Whether this change came about or not I was unable to determine. However, it looks like the solicitation of comments was still going on in 2006.


In appears apparent that much of the mortgage crisis we’re now experiencing, which has lead to failings like that of Bear Stearns, can be traced to this ruling by the Bush administration and the failure of Congress to step in and fix it.




1  The FFIEC oversees the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).


2 Stop the OCC Power Grab. StopATMFees.com.


3 Greenhouse, Linda. Ruling Limits State Control of Big Banks. The New York Times, April 18, 2007.



© The Issue Wonk, 2008






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