Supreme Court Bends Over for Mortgage Banks

With very little fanfare the Supreme Court ruled in favor of Wachovia Bank in the Watters vs. Wachovia case last week. The case was about whether a subsidiary mortgage company of Wachovia Bank should be governed by state laws or federal law. Most of the big mega banks we are all familiar with (WAMU, BofA, Wells Fargo, Citibank, etc) are regulated by federal laws under the National Banking Act and enforced by the Office of Comptroller of the Currency (OCC) which means they are generally exempt from state banking laws. The case in question was about whether a subsidiary of these companies should be regulated at the state level or federal level. Basically the Court ’s ruling said that any subsidiary of federally regulated banks are exempt from state laws.

What does this have to with mortgages? A lot. With all the hype about predatory lending and recent state legislation, one key fact that has been consistently left out of the mainstream media and conveniently forgotten by supporting politicians is that these laws DO NOT APPLY to federally regulated banks. In other words, the only businesses that are impacted by anti-predatory lending laws at the state level are mortgage brokers and in some cases, smaller state chartered banks. The big mega banks can keep on screwing over consumers till the cows come home regardless of what kind of laws are passed at the state level. The Supreme Courts ruling further validates this.

The impact of this ruling is that it continues to tilt the playing field in favor of large banks over smaller mortgage brokers who would have to comply with many of the onerous state laws that are being debated in state legislatures across the country. In other words, they are anti-small business laws.

Mortgage brokers and large mortgage banks often times have a strained relationship. Mortgage banks need mortgage brokers to sell their loans to on a wholesale basis, but at the same time mortgage brokers have consistently taken market share from banks because brokers tend to the cheaper. The retail mortgage divisions of banks have been unable to compete on price so many feel they have been using legislative tactics to tie the hands of brokers.

Now let’s bring this issue closer to home and examine yet one more reason why House Bill 4050 is one of the dumbest pieces of legislation ever conceived by the People’s Republic of Illinois. If you recall, HB4050 is the attempt by Governor Blagojevich and Speaker of the House Mike Madigan to force mandatory credit counseling on home owners in Cook County. However, the law only applies if you obtain your home loan through a mortgage broker. So if you decide to get the same loan through one of the mega banks, you aren’t subject to the mandatory credit counseling or your personal information being submitted to the State database. Makes a whole lot of sense doesn’t it? The law is like saying if you buy a gun from a small gun dealer, you will need a background check. However, if you go to Wal-Mart to buy a gun, no background check is needed. Of course, this is completely ignoring the fact that a gun is a gun regardless of where it is obtained. The same applies to mortgages. The negative amortization option ARM from Washington Mutual is just as toxic to average consumers if you get from WAMU directly or if the mortgage broker gets it for you wholesale.

Unfortunately, mortgage brokers are a small rag tag bunch and don’t really have the political power of the mega banks and we have taken an ass whupping in the media as expected. The big banks get to sit back and relax as if they are innocent wolves in sheep’s clothing. What will happen is that the big banks are going to set up more mortgage subsidiaries who can operate outside of the scope of state lending laws. Of course, it will be a lot easier to be predatory when no one is looking over your shoulder.