(WSJ, 2007b). According to data from public disclosure records, the mortgage industry contributed more than $271 million on federal lobbying and $24.6 million in PAC donations between 1999 and 2007 (Common Cause, 2007). Industry-sponsored legislation was introduced in 2000 and reintroduced in 2003 and 2005 to weaken consumer protection requirements.<sup>38</sup> The industry-sponsored bill languished when one of its Congressional supporters was jailed on corruption charges. Legislation supported by consumer advocates was introduced in 2005. It would have tightened subprime reporting rules, but it failed to gain support in the Congress.<sup>39</sup>

**State government attempts to restrict subprime lending in their states instigated a strong negative reaction from national government and from the mortgage lending industry.** Given persistent concerns about subprime lending practices and the limited impact of Federal law, by January, 2007, a total of 27 states had passed new laws, according to the lending industry (Butera and Andrews 2006). The industry lobbied state legislatures to weaken the laws they passed, arguing that it would be uneconomic to work in an environment of inconsistent state rules. The OCC, in a decision upheld by Federal courts, exempted all national banks and their subsidiaries from adherence to state predatory lending laws.<sup>40</sup>

# **The Fragmented U.S. Regulatory System Contributed to the Slow Regulatory Response**

**The U.S. financial regulatory system permits mortgage lenders to move risk to where capital charges are lowest and regulatory scrutiny is lightest.** The system has evolved over the years into a complex and fragmented collection of national and state agencies with competing and overlapping mandates.<sup>41</sup> Regulatory responsibility of the separate agencies reflects institution type, since distinct financial institutions used to be responsible for distinct financial products. There is one supervisor for banks that once were specialized mortgage lenders, and another for traditional commercial banks. However, such institutional distinctions disappeared in the 1980s and 1990s with liberalization of the financial system. The result is that a given economic activity such as mortgage lending may be the subject of disparate regulatory treatment as a result of the choice that an entrepreneur makes when registering as a national bank, state bank, or as a non-bank lender. Other regulatory activities are split across agencies. The agency that has

> 38 The Responsible Lending Act, H.R. 1295, 2005, introduced by Congressmen Bob Ney (R-OH) and Paul E. Kanjorski (D-PA) was supported by the Mortgage Bankers Association and industry lobbyists such as Butera & Andrews. It would have reduced the interest rate threshold for defining a subprime loan, but allowed lenders to exclude single premium credit insurance from the costs counted towards the fee threshold. Ney was jailed in 2006 in connection with improper lobbying payments unrelated to the mortgage industry.

> 39 H.R. 1182 The Prohibit Predatory Lending Act was introduced by Congressmen Brad Miller (D-NC), Mel Watt (DNC), and Barney Frank (D-MA). Among other things, it would have expanded the scope of HOEPA to cover purchase money loans and open-end loans, and set the APR threshold at 5 percent.

> 40 12 CFR Parts 7 and 34, [Docket No. 04–04], RIN 1557–AC73, February 12, 2004.

> 41 Many observers and many of the U.S. financial regulatory system’s leaders have described it as excessively complex and fragmented. A working group headed by the Secretary of the Treasury has called for the system’s restructuring and simplification. A General Accounting Office 2004 report called for simplification (GAO 2004b). Major deregulation of the financial industry started with the Depository Institutions Deregulation and Monetary Control Act Of 1980 (DIDMCA). Among other things, DIDMCA eliminated controls over depository interest rates, pre-empted state usury limits on mortgage interest rates, and eliminated most restrictions on the lending products that banks could offer.

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