McCoy, Patricia A. --- "Federal Preemption, Regulatory Failure and the Race to the Bottom in US Mortgage Lending Standards" [2010] ELECD 695; in Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur (eds), "The Panic of 2008" (Edward Elgar Publishing, 2010)

Book Title: The Panic of 2008

Editor(s): Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802611

Section: Chapter 6

Section Title: Federal Preemption, Regulatory Failure and the Race to the Bottom in US Mortgage Lending Standards

Author(s): McCoy, Patricia A.

Number of pages: 37

Extract:

6. Federal preemption, regulatory
failure and the race to the bottom in
US mortgage lending standards
Patricia A. McCoy*

INTRODUCTION

In the debate over the Great Recession of 2008­2009, much attention
has been paid to whether consumer financial protection should continue
to be dispersed among state and federal regulators or transferred to a
single federal agency dedicated solely to consumer protection, as the
Obama Administration has proposed. In this chapter, I argue that the
Administration's proposal is essential for three reasons. First, during
the housing bubble, our system of fragmented regulation drove lenders to
shop for the easiest legal regime. Second, the ability of lenders to switch
charters put pressure on banking regulators ­ both state and federal ­ to
relax credit standards. Finally, banking regulators have routinely sac-
rificed consumer protection for the short-term profitability of banks.
Creating one, dedicated consumer credit regulator charged with consumer
protection would establish uniform standards and enforcement for all
lenders and help prevent another death spiral in lending.1
The reasons for the breakdown of the home mortgage market and
the private-label market for mortgage-backed securities are well known
by now. In this chapter, I focus on lax lending standards for residential
mortgages, which were a leading cause of today's credit crisis and reces-
sion. Our broken system of mortgage finance and the private actors in that
system ­ ranging from mortgage brokers, lenders, and appraisers to the
rating agencies and securitizers ­ bear direct responsibility for this break-
down in ...