A Master of Disaster
"It's just amazing that after all that's happened, Dugan still says nothing happened, and whatever did happen wasn't the OCC's fault," says Kathleen Keest, a former assistant attorney general for the State of Iowa who serves as senior policy counsel for the Center for Responsible Lending, a consumer advocacy group. "Why did his banks need big bailouts if they were making such great loans? It's like he's standing in a room full of broken crockery and saying, 'I didn't break that cup.'"
Dugan repeated his narrative in a speech in September: "It is widely recognized that the worst subprime loans that have caused the most foreclosures were originated by nonbank lenders and brokers regulated exclusively by the states. Although the OCC has little rule-writing authority in this area, we have closely supervised national bank subprime lending practices. As a result, national banks originated a relatively smaller share of subprime loans and applied better standards, resulting in significantly fewer foreclosures." Dugan then concluded that "nothing in federal law precluded states from effectively regulating their own nonbank mortgage lenders and brokers."
Yet both Dugan and his OCC predecessor, Clinton appointee John Hawke Jr., have crusaded to defang state regulators. The OCC oversees federally chartered banks. Until 2004 states were able to enforce anti-predatory lending laws against any bank operating within their borders, regardless of whether the bank's corporate charter came from the state or the federal government. But the OCC changed all that, insisting that while state laws did in fact apply to national banks, only the OCC had the authority to enforce them. The order was so broad, it prevented states from enforcing their own laws against state-chartered subsidiaries of national banks and even mortgage brokers who worked with national banks.
The pre-emption of state consumer protection laws was a deliberate attempt to preserve the ability of the nation's largest banks to earn short-term profits from predatory loans. Every major OCC-regulated bank--Wells Fargo, Chase, Citi, Bank of America and Wachovia--had tremendous subprime and no-documentation loan operations. When state regulators tried to enforce their own laws, the OCC joined forces with a bank lobby group to sue the states. When courts sided against the states, the OCC became the sole agency responsible for cracking down on predatory lending at national banks--and it didn't lift a finger. State investigations throughout the country shut down, and state legislatures stopped moving to enact stricter laws.
"It created a get-out-of-jail-free card for national banks and their subsidiaries to engage in dangerous underwriting practices, and then it put pressure on the states to relax underwriting standards" says McCoy, who served as a member of the Federal Reserve's Consumer Advisory Council from 2002-04, warning the regulators about the dangers of predatory lending.
The big banks moved fast. When state regulators in Illinois took aim at a subsidiary of Wells Fargo, the company quickly reshuffled its legal paperwork and moved the offending sub-company under its nationally chartered bank, where the OCC could shield it from state action.
"It didn't just affect national banks, either," says Chuck Cross, a former regulator with Washington State. "Remember, the state-chartered banks can jump charters. They can go from a more restrictive state regulator to a less restrictive OCC. That creates a very tenuous political environment for a state trying to pass laws."
But twenty-six states did tighten mortgage standards over the course of the housing bubble. Meanwhile, Dugan was actively looking the other way. In 2006 the OCC finally offered guidance on nontraditional mortgage lending, in lieu of formal regulations, and didn't bother to enforce that guidance, since it was, after all, just guidance.
The OCC's dramatic reinterpretation of banking law was initiated by Hawke, but Dugan ramped up those efforts. In the current debate over the creation of a Consumer Financial Protection Agency, Dugan has demanded that the OCC have exclusive power to enforce consumer protection laws over national banks, with no authority for state regulators or even the new CFPA.
Dugan's aggressive stance against consumer protection extended even into the basic function of collecting data on foreclosures. In 2007 a group of state attorneys general formed the State Foreclosure Prevention Working Group (SFPWG), which tried to gather information from major banks about what kinds of loans were causing problems and what the banks were doing to solve them. The banks turned to Dugan, who instructed them not to work with the state officials. Federal pre-emption was so sweeping, according to Dugan, that banks couldn't cooperate with state regulators on gathering data.
"So even though these folks are operating in our states, the foreclosures are affecting our communities and the banks are asking us to help them get in touch with the public to encourage them to contact their servicer--despite all that, we can't know what the banks are doing," says SFPWG member John Ryan.
Six months later, the OCC began issuing its own bank-friendly mortgage data. The first report, from June 2008, included no information on the quality or effectiveness of efforts by banks to work out loans with troubled borrowers--the primary purpose of the state AG effort. In December 2008, the OCC finally started publishing relevant data on loans that banks had modified, but it failed to distinguish between modifications that reduced borrower payments and schemes that increased their monthly burden. Dugan told a housing conference that month that he was shocked, shocked to learn that more than 50 percent of mortgages that banks had modified had quickly redefaulted.
The figure wouldn't have surprised him if he'd been interested in gathering useful data. A study by Valparaiso University Law School professor Alan White found that less than half of loan modifications performed by banks had decreased borrowers' monthly payments. In other words, the banks weren't trying to help people stay in their homes; they were trying to squeeze them for just one more check.
Dugan's term expires in August 2010, when President Obama can reappoint him or nominate someone else. But given Dugan's record, it's hard to see why he has been allowed to stay on the job for Obama's first year. It is not customary for the president to discharge the comptroller in the middle of his term, but he does have the legal authority to do so.