Bank Mortgage Regulation Debate May Help Consumers at the End

The Wall Street Journal sees it as a “States Rights” case that will come before the Supreme Court on April 28, 2009. But it has an unusual twist. Normally states bring up the States Rights argument against the federal government when the fed wants them to do things (like civil rights, clean air and water) that they do not want to do.

This time, it is the opposite. The states want to apply consumer regulations to banks doing business in their states (most have joined this case). These banks, in turn, claim immunity from state regulation because they have registered as “national banks” with the Office of the Comptroller of the Currency (OCC). In fact the OCC wooed these banks (who pay fees for their membership) by promising to free them from state laws.

One example of this is mortgage regulations. In the state of Massachusetts, a bank is not allowed to charge prepayment penalties on a mortgage if the house is sold after one year. But the OCC has no such rule and I saw one “national” bank that charged prepayment penalties for a full three years after purchase.

This cost a woman with whom I was working as volunteer -a single mother who was selling her house a year and a half after getting a mortgage on it as part of a divorce- $15,000 in prepayment penalties. I got her back about $11,000 of this, but it was not easy.

In the case going to the Supreme Court, New York state was trying to make banks explain why they were charging higher interest rates to Blacks and Hispanics. The banks claim that they are not beholden to the state of NY, only to the OCC, and refused to respond to subpoenas.

The court has ruled in favor of the OCC in the past, but this was before the collapse of the financial system. If they do decide against the state of New York this time, Congress may step in and override the decision and the Obama administration is expected to sign such a bill.