Thursday, December 3, 2009

The Most Important Supreme Court Decision for Homeowners and Our Economy In Decades

Originally posted by Mandelman Matters Blog.

Cuomo v. Clearing House

There are some things that every single US citizen should know…


In 2003, the Office of the Comptroller of the Currency (“OCC”), proposed a regulation that would preempt essentially all state banking and financial services laws as applied to national banks and their operating subsidiaries. In other words, if a state’s governor, legislature or Attorney General didn’t like the way a bank was operating for whatever reason… tough cheese… not much could be done about it. The regulation meant that only federal agencies could do much of anything as far as the national banks were concerned.

The regulation was opposed by the National Conference of State Legislatures, which is an organization that’s supposed to make sure that state legislatures have a strong and cohesive voice in the federal system, but in this instance that “strong and cohesive” voice must have lacked strength and/or cohesiveness, because in 2004, the OCC got its way and their proposed regulation went into effect.

But that’s no way to start telling a story…

Our story begins in New York, way back in 2005…. the good old days, as it were… when, for the first time ever, the Federal Reserve released home mortgage data that included information on the race, sex and income of loan applicants. Well, New York’s then-Attorney General, Elliot Spitzer, apparently perused the Fed’s data and noticed that if a person had a high interest (read: sub-prime) mortgage, the odds were quite good that he or she was a minority.

In other words, Elliot got the idea in his head that maybe… just maybe, the banks were taking unfair advantage of inner city lower income types by forcing them into lousy loans just because they could. Crazy, I know. Where in the world would he get a wild-ass idea like that, do you suppose? Oh that’s right, from the Federal Reserve’s published data, I forgot. Anyway, Spitzer decided he’d better take a closer look into the lending practices of national banks.

Spitzer claimed authority to conduct his investigation under federal and state anti-discrimination and consumer protection laws, and sent “letters of inquiry” to the banks asking for information related to their lending practices.

Now, here’s where it starts to get weird…
In response to Spitzer’s “letter of inquiry,” the Clearing House Association (“CHA”), which can be described as a “consortium,” (or perhaps “cabal” is a better word) of national banks,” filed a lawsuit against Spitzer, asking the court to issue an injunction stopping Spitzer from issuing any subpoenas in his investigation. Not to be left out, the OCC brought a similar action and the two suits were combined into one. Obviously, somebody didn’t want the AG of NY looking at any bank lending practices.

In The National Bank Act it states: “No national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof.”

The courts agreed with the position taken by the CHA and OCC, issuing a permanent injunction against Attorney General Spitzer that prevented him from issuing any subpoenas or demanding an inspection of any national banks’ records. The New York Attorney General was not going to be allowed to take a closer look at any of the bank’s lending practices. The court held that the phrase “visitorial powers” is ambiguous, but that the OCC’s interpretation of the phrase, in that it preempted the states from enforcing state laws on national banks, was reasonable and therefore entitled to something called “Chevron deference”.

“Chevron deference” is not a new fuel additive that keeps your car’s engine clean. The term does, however, come from a U.S. Supreme Court decision involving the oil and gas company, Chevron.

Chevron deference is considered a doctrine of administrative law. It states that when a law is judged to be ambiguous, but it falls within the subject matter jurisdiction of a federal agency, then as long as the agency’s interpretation is considered reasonable, then it’s the final word on the subject. In other words, when no one can agree what a law means, and you let a federal agency decide the answer, it’s known as “Chevron deference”.

Spitzer was never one to be easily dissuaded; he appealed the decision, but lost again. And that was the end of Elliot’s go at the national banks.

Then, in 2007, a Supreme Court decision again confirmed OCC’s preemption of state laws and regulations as related to banks, when the court ruled that Wachovia Mortgage Corporation, which was a wholly owned subsidiary of Wachovia Bank, was not subject to regulation by the Michigan Office of Insurance and Financial Services.

Still with me? Hang in there… it’ll be worth it.

Cuomo v. Clearing House: This Changes Everything

Fast forward to 2009, New York’s Attorney General is now Andrew Cuomo and he’s decided to pick up where Elliot left off when he was rudely interrupted spending money on a hooker. AG Cuomo basically argued that the OCC’s interpretation so significantly altered the balance of power between state and federal governments, that it required a clear statement by Congress. He even questioned whether “visitorial powers” were involved in his actions. All he wanted to do was enforce state laws.

Cuomo also argued that the OCC’s interpretation made national banks immune from any state enforcement of consumer protection and/or antidiscrimination laws. He said that because the OCC doesn’t have the ability and expertise to emulate the roles of state attorneys general, it should not be permitted to preempt the states’ traditional role, protecting consumers’ interests.

It’s the Supreme Court we’re talking about here, so there was a fair amount of arguing back and forth, but to make a long story at least somewhat shorter, the bottom-line is that he won… Cuomo did it! The Supreme Court finally overturned their previous decisions on the OCC interpretation and as of this past June 28th ruled 5-4 that federal banking regulations did not preempt the ability of states to enforce their own fair-lending laws.

In reaching that decision, the court opened up the national banks to being investigated by state attorneys general related to violations having to do with state consumer protection laws. At that moment, the bankers knew, as the song says, that they had trouble… right here in River City.

And that, ladies and germs, is why you’ve got to love the good old judicial branch, with their lifetime appointments. It may not sound like much, but at least we know that there are five people with power in our government that don’t concern themselves with the banking lobby’s highly influential and well-funded influence peddlers.

State Attorneys General Start Your Engines…

Although the media has only recently started to catch on, the impact of the court’s decision was immediately understood by state Attorneys General across the country, many of whom have already started assigning their staffs to the exploration of how their new-found power might be used. Unquestionably, their first stop is the foreclosure crisis, although future efforts are likely to include other lending related issues such as credit cards, and the like.

Arizona’s AG, Terry Goddard, is one of the attorneys general leading the pack. Arizona continues to be one of the states hardest hit by foreclosures, and Goddard has had enough with the lip service of lenders and servicers. Foreclosures across his state now consistently exceed 7,000 a month.

Lenders and servicers have been asking Goddard to encourage homeowners to contact them directly, so that’s exactly what he’s done to-date. But the homeowners that try to contact their banks, just end up calling the AG back, basically saying they’d likely have more success obtaining a loan modification by calling a cactus.

According to a recent story in The New York Times, Goddard said: “People call and get the runaround. Their paperwork gets lost. It’s time to stop this absurd dance.”

The Times’ story quotes Goddard as saying that he and other AGs have tried to be persuasive with the lenders and servicers in an effort to get them to be a meaningful part of a solution to the crisis that they had such a large role in creating. But Goddard says: “… their waterfall of excuses, the abysmal numbers of modifications, tells us that persuasion is not working. As a result, we’re moving much closer to litigation.”

Goddard and his peers in other states are considering lawsuits accusing the banks of creating and marketing millions of bad loans, and failing to fulfill their promises related to loan modifications. Such lawsuits would have been impossible prior to June’s Supreme Court decision in Cuomo v. The Clearing House.

Every state has laws that prohibit fraud in consumer lending, and states are now exploring the idea of litigation alleging that the banks engaged in massive fraud against consumers by marketing unintelligible loans that they knew would be impossible for most people to repay. Banks did so to earn what added up to billions in short-term fee income from originating the loans, and then quickly sold the loans to government entities, like Fannie and Freddie, who then required costly taxpayer funded bailouts.

Cranky Bankers…

The banks and their powerful lobbies, it should go without saying, are none too pleased with the recent developments inspired by the Supreme Court’s decision. The Mortgage Bankers Association, one of those lobbies, declined to comment on the situation when asked by The New York Times, but spokesperson John Mechem had the unmitigated audacity to warn… or rather, threaten that consumers would be the ones that end up paying for any increased legal activity.

As quoted by the Times, Mechem said: “Lawsuits add to the patchwork of regulations that increases compliance costs to lenders, which in turn increases the cost of credit to borrowers.”

What a jackass this guy is. I mean, I don’t think I can remember hearing anyone say anything quite that offensive, since perhaps that little pocket-knife rattling moron in Iran said something about taking on the world over nuclear power. I’m not proud of what I’m about to admit, but when I read what Mechem said, all I could think of was kicking his insipid little ass all around a parking lot.

How dare you, Mr. Mechem? Who in the world do you think you are? Did you really just respond to the possibility of state lawsuits designed to right the unthinkable wrongs committed against American consumers and our society as a whole by those who write your paycheck, by saying that we better not because your guys will make us all pay? Did you think that would get us to back down and let your guys off the hook? You’re an idiot, Mechem, a real life, honest to goodness idiot.

And not only that, but did you really threaten us with increasing the cost of credit? Seriously? Seriously?

How in the world could taxpayers possibly ever pay more for the cost of credit than we’re paying NOW as a result of what the banks did over the last so many years? You mean that you’ll make us pay more than that? More than the $700 billion in TARP, and the countless TRILLIONS in free loans?

What are the banks going to do, charge 70% on credit card balances? More than 390% on hard money loans, the new limit set by the credit card reform legislation that you weakened before allowing it to pass through the legislature earlier this year? How about more than $25 for a $2.50 overdraft?

Go ahead, Mechem, go tell the bankers of this country to just try to punish us by heading down such a path, and the next time I personally borrow a nickel will be… hmmm… let’s see… perhaps when pigs fly, comes to mind, which will be roughly the same year your pals get their next zillion dollar bonus. I’d rather live in a tent under the 405 Freeway and keep my retirement savings in a Hills Brothers coffee can, then back down to your bullying threats.

The Banking Lobby Shifts Into High Gear…

Every single American should know: If the banks have anything to do with it, the American consumer’s victory won’t last long. The banks are hot and heavy lobbying Washington D.C. to make this problem go away. They want Congress to block the states from being able to take more aggressive legal action. They want Congress to preempt any state laws that are more restrictive than federal statutes.

In fact, just two weeks ago, the House Financial Services Committee voted to give the federal government the power to stop states from regulating the behavior of national banks in certain instances. The new rule says that the OCC can override the states in cases where the OCC finds that a state’s laws interfere with regulatory policies at the federal level. Not the end of the world, perhaps, but it’s sure to represent only the beginning of the bank’s efforts to dismantle any laws that attempt to level the playing field or place them at risk of being held accountable for what they’ve done or may do in the future.

When it comes to the banks, you can count on the fact that they only want to play in a game where it’s heads they win and tails we lose.

Goddard says that after the Cuomo v. Clearing House decision he had a virtual parade of bank executives coming through his offices expressing the desire to better address the 7,000 monthly foreclosures by improving the loan modification process. But, Goddard says that the bankers were unwilling or unable to provide him with any of the information he asked for, such as how many and what types of loans they have in his state.

Goddard is far from alone in his thoughts about the banks and servicers. Illinois Attorney General Lisa Madigan brought a civil rights suit against Wells Fargo. When the suit started, the Wells Fargo branches were operating under a state charter, and the bank responded to the state’s subpoena. But soon, the Illinois branches were moved and placed under control of Wells’ national bank charter and that was the end of that. Wells Fargo immediately informed the state of the change, stopped cooperating with the subpoenas, and basically said: “But thank you for playing.”

Madigan says that this sort of maneuvering has made it easy for those in the banking industry to hide misconduct and avoid prosecution for years. And Ohio’s Attorney General, Richard Cordray was quoted by the Times as saying: “For the better part of eight years, the federal regulators were not being aggressive, and at the same time we were disabled. There was nothing holding back irrational and irresponsible practices.”

Wake up, America. Or as sure as I’m writing this, defeat will be snatched from the jaws of victory…

So far this year, while most Americans have seemingly been preoccupied with other things, the banking lobby has managed to have its way with every single piece of legislation our legislature has considered or ultimately passed. The Democrats, and some Republicans, and supposedly President Obama wanted to reform the bankruptcy code to allow judges to write down mortgages on primary residences for homeowners filing bankruptcy… but the banking lobby, after spending a reported $45 million in lobbying efforts, killed the legislation… twice.

The credit card reform bill came in like a lion, but when the banking lobby was done with it, was passed into a lamb of a law. The controversial Home Valuation Code of Conduct, or HVCC, which gives the banks greater control of appraisals, and removes all the other parties to a real estate transaction from the picture, was adopted nationally without it even going though the legislative process.

H.R. 1728, which has been named the Mortgage Reform and Anti-Predatory Lending Act, neither reforms mortgages, nor does it meaningfully address what most people think of as predatory lending. Instead, this bill, which has already passed the House and is now in the Senate, limits the rules and increases the costs born by individuals when selling homes they themselves own.

And, as far as passing any legislation even remotely designed to prevent the global meltdown of our financial markets in the future by tightening up regulatory oversight of the commercial and investment banks in this country… well, we’ve done absolutely nothing in that regard. Even the creation of a new federal agency, whose purpose would be to protect consumers from the often egregious acts of banks and other financial institutions, has been moving though our legislature with the speed and grace of a wild boar moving whole, through the digestive tract of a python.

There should be no question in anyone’s mind at this point that our government is being driven by the financial oligarchy that has amassed too much legislative clout over the last thirty years of bull market. What’s in the best interests of Wall Street should no longer be seen as being in the best interests of the country as a whole. And if we don’t let our elected representatives know that we are watching and will not tolerate our elected officials blindly voting according to the wishes of the banking lobby, then our economy will not begin the recovery we’re hoping for, and frankly, we will deserve everything we collectively get.

The United States Supreme Court has decided that a state can look into and prosecute financial institutions that operate as part of our national banking system when they’re suspected of having broken the laws of that state. And that will be the law of our land, unless we say nothing, in which case I have no doubt whatsoever, that the banking lobby will persuade Congress to pass legislation that will render the court’s ruling moot and let lenders and servicers off the hook for wrong doing yet again.

It’s up to us, the voters, as we enter the coming election year, to make sure our elected representatives hear our voices loud and clear:

Vote as the banks tell you to vote and there’s not enough money in the world to get you reelected, but vote in the best interests of the people of this country, and you won’t need the banking lobby’s money to get reelected.

Iowa’s AG, Tom Miller, seemed downright thrilled with the Supreme Court’s decision, by the way. The story in the Times quoted Mr. Miller as enthusiastically saying:

“We’re back on the field. That’s really important. Certainly there will be some litigation.”

I sure hope so, Mr. Miller, I certainly do hope so.