The time has come for federal and state lawmakers and regulators to sort out the complicated and conflicting laws that now govern the nation’s banking system. One good approach that’s already gained some traction is federal laws that can be copied at the state level and thus applied to both national and state banks. More of the same approach would be beneficial for banks, borrowers, regulators and the banking system.
Two examples illustrate the problem:
Last month, the U.S. Supreme Count heard arguments in Watters v. Wachovia Bank, in which a national bank argued that states can’t impose their own regulations on the bank’s state-chartered subsidiaries. The bank’s argument depends on a 2001 ruling by the federal Office of the Comptroller of the Currency that said federal law preempts such state regulations even when the national bank’s subsidiaries are state-chartered. The case presents a clear conflict between the powers of federal preemption and the need for state-level regulation. Model federal laws copied at the state level would make the issue a technicality.
In Chicago, a state law that mandated credit counseling for certain borrowers triggered an exodus of lenders who didn’t want to comply with rules that affected only 10 ZIP codes. The question of whether credit counseling was reasonable, necessary and appropriate for those borrowers became all but moot when more than two dozen lenders abandoned the marketplace. The fact that the law applied only in one place gave the lenders’ an excuse to exit the market even though their actions looked suspiciously like red-lining. Federal laws copied at the state level would discourage such market shopping.
One example illustrates the solution:
More than a dozen states have announced plans to adopt new predatory lending guidelines that mirror those promulgated at the federal level. The guidelines were developed by five federal agencies: the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corp., National Credit Union Administration and Office of Thrift Supervision. Both the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators support state adoption of the guidelines. The CSBS also has posted a useful list of states that have adopted the guidelines. This approach is on the right track and demonstrates that cooperation is possible.
Alternative solutions in which the federal government either takes over the banking system or abdicates any involvement in banking aren’t feasible or desirable. An exclusively federal system would be too remote from local enforcement (despite the possibility of branch offices) and wouldn’t have the benefits of local knowledge or existing state infrastructure for investigation and enforcement activities. On the other hand, an exclusively state-level system would be subject to inconsistent laws, which doesn’t benefit borrowers, banks or the system itself.
More consistency would enable banks to standardize practices across states and create cost-saving efficiencies in loan operations. More consistency also would eliminate national banks’ specious argument that stricter federal guidelines shouldn’t be promulgated simply because they wouldn’t apply to state-chartered lenders as well. The death of that argument would benefit both banks and borrowers.
Borrowers also could benefit from passed-along cost savings. And borrowers who relocated from one state to another wouldn’t have to unlearn and relearn local bank practices. More consistency also would strengthen the system because it would empower federal and state regulators to share tactics and cooperate on investigation and enforcement.
A good beginning would be a set of comprehensive federal laws, regulations and guidelines that incorporated the best and most effective state regulations. Those practices then could be crafted into model state laws that states would be encouraged to adopt without modification. This process would create consistency, yet wouldn’t hand over the banking system to either the federal government or the states. Banks would still be able to operate with either federal or state charters, perhaps on the basis of their geographical presence on the ground.
A complete soup-to-nuts overhaul of the current system along these lines would be a boon to the nation, yet it would require significant resources to craft the model guidelines and significant political will to gain the cooperation of all the governmental entities that have a stake in the status quo. That doesn’t mean it’s impossible, however, so why not demand the best solution possible?
Marcie Geffner is a real estate reporter in Los Angeles.
Copyright Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.