They Warned Us About the Mortgage Crisis

(page 4 of 5)

Browse Issues

Browse the BusinessWeek Archive

Roy Cooper, North Carolina AG Ethan Hill

Former OCC Chief John Hawke Ethan Hill

Georgia legal aid attorneys Brennan and Brown Ethan Hill

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

The OCC's Hawke assisted the industry by issuing a ruling in July 2003 saying the Georgia law did not apply to national banks or their subsidiaries. A fact sheet prepared at the time—and still available on the OCC's Web site—says: "There is no evidence of predatory lending by national banks or their operating subsidiaries, in Georgia or elsewhere."

The OCC ruling had been requested by Cleveland-based National City Bank (NCC) on behalf of several of its units, including First Franklin Financial, a subprime lender that operated in Georgia and other states. First Franklin, which was acquired by Merrill Lynch in 2006, has been hit with dozens of suits alleging unfair lending practices. Merrill shut down First Franklin's troubled lending business in March. Itself hobbled by mortgage-securities losses, Merrill agreed last month to be acquired by Bank of America (BAC). The bank and Merrill declined to comment.

In August 2004, Hawke went a step further in a letter to the Georgia Banking Dept. He said even state-chartered mortgage brokers and lenders were exempt from the Georgia law—if the loans they handled were funded at closing by a national bank or its subsidiary.

By then support for the Georgia law was already eroding. Barnes, a Democrat, lost his reelection campaign in November 2002, and his Republican successor moved to dilute the lending act. Still, supporters mobilized to defend the legislation. One was William J. Brennan Jr., an Atlanta legal aid attorney who specializes in housing and had testified before the U.S. Congress in 2000 about what he saw as the looming mortgage mess. He told the House Financial Services Committee: "The entry of many prominent national banks into the subprime mortgage-lending business has resulted not in reform, but in the expansion of the abusive practices." Federal regulators, he testified, "have done little to stop" the trend. In early 2003, Brennan and a legal aid colleague, Karen E. Brown, consulted with Georgia legislators trying to block amendments softening the lending law. At a hearing in February, Brennan requested a police escort because he feared that angry mortgage brokers would block his way. "The words that come to mind are 'outgunned' and 'overwhelmed,' " says Brown.

The Georgia legislature sharply curtailed the assignee liability provision in March 2003 and eliminated other elements of the law as well. Subprime lenders such as Ameriquest Mortgage that had halted lending in Georgia in protest of the law resumed marketing high-interest, high-fee mortgages. But by late 2007, Ameriquest had gone out of business after agreeing to a $325 million settlement to resolve suits alleging that it had made fraudulent loans.

ESCAPING STATE ENFORCEMENT

Georgia now has the sixth-highest rate of foreclosure in the country. Consumer advocates and state attorneys general contend the weakening of the state's law was a severe blow to efforts to curb careless lending. "Had the Georgia Fair Lending Act not been watered down, we would be in a very different place right now," says Brown.

In some states, dubious local mortgage firms sold themselves to national banks, gaining protection against state enforcement. The Iowa Division of Banking in 2006 sought to examine a subprime broker called Okoboji Mortgage in the town of Arnolds Park. A borrower had accused the firm (named for an area lake) of duplicitous lending practices. Cheryl Riley, a 52-year-old janitor, told state officials she had not received the 30-year fixed-rate mortgage she thought she had arranged with Okoboji in 2005. Instead of one monthly statement, Riley got two: one for a 9.25% adjustable-rate loan and another for a 15-year fixed loan at 12%. Both rates were far higher than what Riley and her husband thought they had negotiated. "We were horrified," she says.