Banking Law

As previously reported, OTS Director John Reich is relentless in his shilling for a continued role for the OTS as a federal regulator. He's jumped all over proposals from Congress that a federal regulator oversee previously unregulated mortgage brokers and bankers. Last week, he spoke to the National Association of Mortgage Brokers and, after kissing up to the audience with bromides about how most of the mortgage banking business is honest and how blame for the current subprime mortgage mess has to be spread far and wide, he told them that the OTS was better suited than HUD to be the primary regulator to oversee a national scheme of registering and licensing mortgage originators. Speaking specifically of H.R. 3915, which passed the House last November, he made some "helpful suggestions."

Under H.R. 3915, the states are given the authority to ensure that all non-federally supervised originators are registered with the Nationwide Mortgage Licensing System and Registry. The states would be required to have a system in place for registering and licensing loan originators and, if they do not, HUD would step in to establish and maintain a system.

American consumers deserve basic protections when they make the largest investment of their lives, and we as public servants, have a responsibility to do our best to provide those protections. We believe that there may be two potential areas where OTS could play a role in achieving this goal ? (1) licensing and registration of mortgage originators, and (2) joint state and federal oversight of state regulated mortgage banking companies.

Regarding the first point, as I said before, H.R. 3915 requires HUD to step in if a state is unable to put in place a system for registering and licensing mortgage brokers and other non-federally supervised originators. I wonder, however, if HUD is best positioned to take on this responsibility. OTS has many attributes that might make us a better choice.

At the OTS, we focus our regulatory approach on maintaining a thriving mortgage lending industry that complies with applicable laws and regulations to protect consumers. We strive to achieve that goal with a minimum burden on the industry. We have an expert staff that has a unique understanding of the financial services and mortgage industries. We believe that the private sector must be allowed to innovate, compete and prosper, but without harming consumers.

Now, regarding my second point, federal oversight of the entities that fund the mortgage process is crucial. It is critical to ensure that mortgage banks be forced to compete by the same set of standards as insured depository institutions. Establishing a partnership between the states and a federal overseer to set and enforce minimum mortgage funding standards would ensure accountability and consistency throughout the mortgage lending process. This could be similar to the partnership that exists between the FDIC and state banking commissioners in the oversight of state-chartered banks.

Such a partnership need not involve establishing a federal mortgage banking charter, but rather a federal-state partnership to regulate these entities and ensure nationwide uniformity. The OTS has extensive expertise in the oversight and supervision of mortgage banking operations that I believe would benefit the currently unregulated mortgage banking market.

It is not my intention to needlessly expand our regulatory authority, but OTS is in a unique position to help level the playing field by acting as a backstop for state licensing and registration for originators, as well as participating in a prudential federal-state supervision of state mortgage bankers who fund mortgages. If Congress determined that the OTS could provide the best solution by taking on these responsibilities, we would certainly rise to the challenge.

It is not my intention to needlessly expand our regulatory authority... Sorry, but when I read that line, I had to shake my head.  Whether he's "needlessly" trying to expand the authority of the OTS is debatable, but he's definitely trying to expand its authority. Who can blame him? While there is support for the federal thrift charter from some quarters, including those who tire of dealing with the FDIC as their primary federal regulator (such as those applicants for a Utah ILC charter who decided to go with a federal thrift charter rather than wait for the FDIC to do its job), and those who enjoy smoother branching powers and a more solid federal preemption power, there is no question  that Countrywide's acquisition by Bank of America and rumors of Wamu being in the crosshairs of JPMorgan Chase have got to give the OTS a serious case of flop sweat.

Actually, Director Reich has a point about the expertise of the OTS in mortgage banking. It does have such expertise. Score one for the OTS. In addition, what Reich did not mention, but we will, is that the OTS has not been subject to the regulatory paralysis that seems to have plagued HUD from time to time over the years. There are also those nasty allegations of cronyism against Alphonso Jackson that have been made during his tenure as head of HUD. I'd say that confidence in HUD is not at an all-time high, so Reich's timing is apt.

As might be expected,  Reich's comments generated a  frigid response from the Conference of State Bank Supervisors.

CSBS President Neil Milner responded "I am concerned that the OTS does not appreciate the tremendous scope and breadth of initiatives the states have undertaken to form a new supervisory system for mortgage brokers and lenders and the enormity of the task to replicate what currently exists and is being developed.  To disrupt our progress would actually be a setback for the improvements in supervision that are taking place.  We are pleased that Congress has recognized the importance of our efforts in the House-passed mortgage reform bill, H.R. 3915, and legislation introduced by Senators Feinstein (D-CA) and (R-FL) this week in the Senate, S. 2595."

In other words, thanks for your offer of "help," but we'll pass.