Regulators Who Ignored WaMu’s Predatory Lending

Regulators Who Ignored WaMu’s Predatory Lending

Regulators Who Ignored WaMu’s Predatory Lending

Exhibit A in why an independent consumer watchdog is needed, both for consumers and the global economy.


Sen. Carl Levin spent the morning lashing into former banking regulators who were supposed to have prevented Washington Mutual’s spectacular 2008 failure, which was the largest-ever bank collapse. It’s now clear both the bank and federal regulators knew the subprime loans that triggered that collapse were at best shoddy and in many cases fraudulent. What also ought to be clear is how utterly inadequate the current regulatory structure is for protecting consumers and how destructive that regulatory failure is to the global economy.

Levin’s particularly incensed about the Office of Thrift Supervision’s effort to keep FDIC Chair Sheila Bair out of the regulatory conversation. Bair was among a few, lone voices in the regulatory world who advocated a tough line against the banks. Levin called OTS’ position, on the other hand, "feeble." He dug up emails in which OTS worked aggressively to keep Bair on the sidelines, including one in which OTS chief John Reich declared, "I cannot believe the continuing audacity of this woman."

Levin’s chairing a investigative panel into how WaMu failed and how regulators dropped the ball. Earlier this week, the Senate panel’s investigation found that WaMu’s executives knew of rampant fraud in the bank’s massive subprime lending operation, including falsifying documents and steering borrowers to high-cost loans. Today, Levin rolled out scores of real-time OTS findings that WaMu had shoddy lending practices — such as ignoring underwriting standards and emphasizing loan volume, regardless of soundness, so that they could be sold in the securities market. Documents show OTS noticing these practices year after year, for five years, and doing nothing to stop them.

The problem was OTS’ too cozy relationship with the bank. As AP reports,


Panel chairman Sen. Carl Levin, D-Mich., says the OTS’ chief, John Reich, called the bank his "biggest constituent" when preparing for a meeting with WaMu CEO Kerry Killinger.



Levin said the OTS was too forgiving with WaMu after agency regulators found glaring problems with its lending and risk management starting in 2002. He called the relationship a "clear conflict of interest," since the OTS is funded by fees from regulated banks including WaMu.

WaMu’s fees accounted for 12 to 15 percent of the OTS’ budget, more than any other bank’s, the report says.

The OTS oversaw WaMu "on a collaborative basis, not a regulatory basis," said Levin, who chairs the Permanent Subcommittee on Investigations.


This is precisely why President Obama proposed a new, independent agency to watchdog all financial products on behalf of consumers. But the bill the Senate’s now considering, led by Sen. Chris Dodd, would instead create a consumer protection bureau inside the Federal Reserve. That bureau would have broad powers to write and enforce new regulations on financial products, but the existing bank regulators would have veto power if new rules threatened their understanding of the banking sector’s "safety and soundness." Levin’s hearings this week ought to be proof enough why that’s a bad idea.

Meanwhile, RealtyTrac reported yesterday a whopping 35 percent jump in foreclosures for the first quarter of 2010, over a year ago. After more than a year of delay, the administration has recently begun encouraging — but not requiring — banks and mortgage servicers to write down the principal balances on "underwater" loans. The same banks that continue to oppose a consumer protection watchdog said Tuesday principal write downs are a bad idea. "We must do it in a measured, responsible way so that only customers with a legitimate hardship and genuine interest in maintaining homeownership qualify," Bank of America home loans president Barbara Desoer told a House committee (emphasis mine).

Those words again: Responsible. Legitimate. Always in reference to borrowers, never to banks — or regulators for that matter.

Cross-posted at RaceWire.

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