S&P, the OCC and fair lending

There has been a good deal of discussion yesterday and today about the prior political activism of Standard & Poor’s in domestic bond markets here in the US (echoing a point made earlier by Mike Konczal).

All of these posts involved the aggressive move by S&P (along with its peers) to refuse to rate mortgage-backed securities that included mortgage loans underwritten in Georgia. This was a direct challenge to Georgia’s fair lending law, which was passed late in 2002 in an effort to crack down on predatory mortgage lending. Both Stoller and Dayen rightly point to the blatant political activism of these efforts on behalf of the mortgage securitization machine, which is to say, Wall Street.

That is bad enough, but there is another aspect to the story of Georgia’s fair lending laws that demonstrates how powerful interests can use organizations to work more effectively on the political process than within it. Shortly after S&P issued its ultimatum, National City Bank (now part of PNC Bank) petitioned the Office of the Comptroller of the Currency for a federal pre-emption of the fair lending law for its local branches. Natl City argued that its charter was national, and that even its local branches should not be bound by the regulations of any single state.

National City’s petition was strategic for two reasons. Most obviously, the OCC as a federal agency is in a unique position to overturn state regulations. But more important, the OCC has in recent decades become supremely effective in putting forward the interests of the largest banks, at the expense of both smaller, locally chartered banks as well as consumers.

In a move which rendered S&P’s activism redundant, the OCC ruled for pre-emption on July 30, 2003 in a ruling which it extended to all national banks and their subsidiaries operating in the state. Wall Street had killed local predatory lending rules much more effectively than it ever could have by the direct funding of election campaigns.

And from the “credit where credit is due” files, a rare bit of good news: the Supreme Court – in a decision penned by Scalia, of all people – ruled against OCC pre-emption in 2009.

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