A Twist on Watters v. Wachovia

Traveling into the national bank official's "Heart of Darkness," the New York Bankers Association, OCC Chief Counsel gave a speech yesterday on the Watters v. Wachovia decision and Ms. Williams' views on what it all means. She pays lip service to the OCC's role as both a safety and soundness regulator and a consumer compliance enforcer, how those two missions are "complimentary, and blah, blah, blah." It's doubtful that she assuaged the fears of state bankers in the crowd that the OCC is an unrestrained regulatory Pac-Man, gobbling up the bank regulatory universe in his snapping, gaping jaws. You have to admit, though, that Julie's a "gamer," and doesn't avoid the potentially hostile crowd. Of course, it's easy to face the unwashed masses with battle tanks at your back.

Her speech did take an interesting twist, though, when she started to talk about the subprime mortgage mess. It wasn't a case of "Speaking Truth to Power." It was more like "Power Talking Smack To the Powerless." Nevertheless, she raised an interesting point or two.

But Watters clarifies accountability in another dimension as well: Both federal and state regulators have jobs to do. And the subprime mortgage concerns we confront today illustrate this point well. The abuses in the subprime lending business – loan flipping, equity stripping, and making subprime loans that borrowers have no realistic prospect of repaying – have not sprouted and spread in the national banking system.

Hard data show that the quality of the subprime loans that are made by national banks is markedly better than those of other lenders – the delinquency rate has run about half the national average. We don’t think this is an accident – it is a reflection of the quality of our supervision and our supervisory standards.

Further, hard data also show that most subprime lending is done by non-bank entities regulated by state authorities. These lenders clearly are – and always have been – subject to the oversight and enforcement jurisdiction of state officials. The Watters decision does not limit their ability to prevent these lenders from engaging in abusive practices or making loans that borrowers have no reasonable prospect of repaying.

I'm sure that the state regulators in the audience relished being bitch-slapped by the Princess of Darkness. Then again, what's this got to do with Watters v. Wachovia? According to Julie, the catch phrase from this point forward is: "Move On."

Despite our past differences, federal and state regulators need to move on – and we are moving on – to a new paradigm of cooperation and collaboration that optimizes use of our respective resources and maximizes consumer protection benefits for customers.

We have made significant progress, for example, working with our state counterparts to improve consumer complaint information sharing. The model Memorandum of Understanding agreed to by the OCC and the CSBS last year provides that we and state regulators will refer misdirected complaints to the appropriate agency. It also establishes a mechanism for state agencies to obtain – without compromising consumer privacy – periodic reports from the OCC on the disposition of complaints they have referred to the OCC’s Customer Assistance Group. I am happy to point out that New York was the first state to enter into this new agreement with the OCC.

It's always nice to do a little gratuitous butt kissing when you're boxing your opponent's ears, to make him feel good that you're condescending to treat him like a brotha', albeit a little brotha'.

Julie goes on to trumpet other OCC efforts, including a brand new OCC website www.helpwithmybank.gov, which consumers can consult when trying to determine which regulator is the correct one to slap down a bank which engaged in a despicable practice, like actually charging an agreed upon overdraft fee when an overdraft was made. I would have named it "www.whodoibitchto.gov", but there's no accounting for personal taste.

She also points out, correctly, that now that the federal banking agencies have issued subprime mortgage lending guidance, it's time for the folks who regulate most of the troublemakers to do likewise.

So, it is critical that all states not just adopt but also effectively apply standards comparable to those adopted and applied by the federal banking agencies.

We are encouraged that 35 states have adopted or endorsed policies and regulations similar to the federal nontraditional mortgage guidance, and that a similar push is underway with respect to the subprime mortgage guidance recently adopted by the federal banking agencies. We applaud these efforts, led by the CSBS. It bears repeating, however, that neither type of guidance can be fully effective until it is adopted and actually applied by all states, not as a suggestion, but as an expectation with consequences attached.

A chest bump to the CSBS. I'm sure Buz Gorman would rather have had a chest bump from Pamela Anderson, but life is cruel, especially in the arid world of bank regulations.

I wonder if the word "ironic" occurred to any of the state regulators when Julie admonished them to do a better job of enforcing state law against mortgage lenders and brokers, when the OCC has done such a crackerjack job of enforcing state consumer protections against national banks. The speech transcript doesn't note applause, laughter, groans, boos or hisses, so it's difficult to know how this passage played out.

She concludes with a short mention of a pilot program that hasn't received much publicity. Perhaps all parties are waiting to see if it actually works before crowing about the dawn of a new era of good feeling between the OCC and its state nemeses counterparts.

Finally, the OCC and state bank supervisors plan to undertake an important new cooperative initiative involving instances in which national banks use independent mortgage brokers regulated by the states. Superintendent Neiman from New York has been a key player in supporting this new approach, which basically involves coordinating federal and state examination efforts of banks and mortgage brokers with respect to the compliance with the nontraditional mortgage guidance and the subprime mortgage guidance. Starting with two states, New York and Massachusetts, through parallel examinations of a sample of national banks by the OCC, and examinations of a sample of state-licensed mortgage brokers by each state, we hope to develop a baseline of useful compliance information resulting from this unique congruence of state and federal jurisdictional interests.

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I want to emphasize that I am hopeful – in fact quite optimistic – that the Watters decision will be the springboard for collaboration, not confrontation, between federal and state interests, for the benefit of the banking system and its financial services consumers.

It's apparent that Julie's optimism is based upon superior knowledge, a cheerful nature, or some excellent hashish. Being a man of a more mournful nature, I tend to take a less slap-happy view of the "spring" in the "board" of Watters v. Wachovia when it comes to future state-federal cooperation.