In 2002, Georgia passed an anti-predatory lending law that had all the usual provisions—it forbade deceptive practices in the disclosure of basic terms, curbed pre-payment penalties that kept borrowers from refinancing or selling their homes, banned usurious interest, etc.—but it also had a twist: it extended liability for violation of the new law to any player in the lending chain, including Wall Street houses that bundled the loans into securities and pension funds that bought them, and left potential damages open-ended.
One can only wonder what might have happened if those reselling mortgages had known they would be liable for how the mortgages were created.
We’ll never know, of course. The Georgia legislature was treated by the mortgage and securities industries and Bush administration regulators to a political version of shock and awe.
Standard & Poor’s dropped a nuclear bomb on the new law in January 2003, when it announced it would “disallow” loans under the new Georgia law from any S&P-rated structured-finance pools. In other words, the loans couldn’t be resold, so no lender wanted to bother lending in Georgia. The McGraw-Hill unit later pulled back on its language, but it’s not clear whether panicked Georgia public officials picked up on all the nuances. With its lending market freezing up, and the mortgage industry lobbying furiously, the Georgia legislature rescinded various offending provisions.
In interviews with me, S&P strongly objects to any suggestion that it meddled in public policy and says it was only doing its job of protecting bond holders (a lot to unpack there; let’s move on). Spokesman Adam Tempkin says S&P couldn’t rate the bonds because the Georgia law left potential liability uncapped, leaving bond-holders exposed. He also says that the company never comments on public policy, but acts only after the fact in bond-holders’ interests. “What legislatures do is up to them,” he says.
Fine. The point about the Georgia predatory-lending affair: it was a big stink at the time.
The U.S. Comptroller of the Currency at the time, John Hawke, for instance, declared that Georgia’s law would not apply to nationally chartered banks, even for business they did in Georgia, and laid down aggressive new federal rules that would block states from enforcing their anti-predatory lending laws on national banks generally.
State attorneys general, including Iowa’s Tom Miller and North Carolina’s Roy Cooper, objected heatedly, as this recent BusinessWeek story reminds us, and called the OCC’s move an unprecedented intrusion on state authority that would harm their states’ consumers.
Then Eliot Spitzer publicly took on Hawke and brought national attention to the issue of lending-industry abuses, the abuses that led to our current moment global financial peril. This is 2003.
Looking back, it is remarkable to see the degree to which public officials—state bank regulators, attorneys general, legislatures, city councils—raised alarms about deceptive marketing in the mortgage lending industry; Georgia’s anti-predatory lending law came three years after North Carolina passed its own anti-predatory lending law, and a year before New York passed another. In fact, anti-predatory lending laws were quite the rage back then. California (2002), New Jersey (2003), New Mexico (2003), Arkansas (2003), Ohio (2002), Oklahoma (refinancing only, 2004), South Carolina (ditto, 2004) Nevada (2003), Massachusetts (2001), and, of course, Maine (2003), all pass them, according to S&P, which keeps track of these things.
And, Kentucky (2003), Kansas (1999), Florida (2002), Chicago (2000), Detroit (2003), Cleveland Heights (?!, 2003) etc., etc. You get the idea. Everyone was passing them.
In professional journalism circles, this is all known as “a clue.”
After weeks of six-column headlines declaring an emergency caused by an out-of-control financial services industry requiring a rushed $700 billion in U.S. taxpayer commitments still wasn’t enough to stem the panic, casual readers of those headlines have started asking a reasonable question: Why are you telling us this now?
Howard Kurtz of The Washington Post tries to answer the question by asking practitioners their opinion. That approach won’t cut it, I’m afraid.