What does a developer want? Happy bankers. And if you are a developer who happens to be the president of the United States, you can make your bankers very happy by dismantling the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank was a pale sister of the Glass-Steagall Act, which the Great Depression Congress passed to prohibit commercial banks from engaging in investment. The repeal of Glass-Seagall in the last year of the Clinton administration was one of the main causes of the real estate bubble and global financial collapse of 2008.
With his denial of global warming and declaration of war on all government regulation, Donald Trump, the developer president, is busy bringing his latest project to market: the new USA, a world wholly made by and for bankers, business, police and the military.
To recall some of the financial chaos from which we have emerged during the Obama administration and will be plunged into again by the developer president, here a few articles on some of the main aspects of the issue as seen from the north San Joaquin Valley, home of three cities which created top per capita foreclosure rates in the nation for many months during the world of the crisis. And, by the way, the foreclosures keep on going on, at least in this region.1. -- blj
Benjamin Bain. Jesse Hamilton
<!--[if !supportLists]-->· <!--[endif]-->President discusses law as he signs order targeting U.S. rules
<!--[if !supportLists]-->· <!--[endif]-->His advisers pledged to dismantle Dodd-Frank after election
President Donald Trump stepped up his criticism of financial regulations, pledging to go after the 2010 Dodd-Frank banking overhaul because he said the law has made it difficult for businesses to get loans.
“We’re going to be doing a big number on Dodd-Frank," Trump said Monday at an event with small business leaders at the White House. He called the legislation “a disaster" and said, “It’s almost impossible now to start a small business and it’s virtually impossible to expand your existing business.”
Trump’s remarks are his most pointed on financial rules since he took office Jan. 20. His advisers vowed to dismantle Dodd-Frank during the transition period, but have provided scant details on how they plan to go about it. Trump didn’t say whether he planned to attack the law through executive action or by working with Congress on legislation.
Banks and investors have been trying to decipher how the billionaire will balance his populist message to the middle class with his Wall Street ties, which include a cadre of former Goldman Sachs Group Inc. bankers he’s tapped for key roles in his administration.
The president’s comments came as he signed an executive order requiring that government agencies revoke two existing regulations for each new one they issue, fulfilling a campaign promise. Trump campaigned on cutting a federal bureaucracy that he blames for making it harder for businesses to grow and get funding.
Trump didn’t provide data linking lending rates to Dodd-Frank.
Key lending portfolios have been on the rise since former President Barack Obama signed Dodd-Frank into law in July 2010. At the time, commercial and industrial lending was at $1.2 trillion, according to data from the Federal Reserve. Almost seven years later, that measure of credit from U.S. banks to the business sector is up almost 70 percent to $2.1 trillion.
Small business loans have declined as a percentage of overall commercial and industrial loans. Commercial and industrial loans of $1 million or less fell to 20 percent in the third quarter of last year, down from 31 percent in the second quarter of 2010 just before the Dodd-Frank Act was passed, according to the Federal Deposit Insurance Corp.
Justin Schardin, an analyst at the Bipartisan Policy Center in Washington who focuses on financial regulation, said it’s unclear how much the 2010 law has directly affected lending to small businesses. “It’s worth looking at all different types of lending to see what impact post-crisis reforms have had,” he said.
Getting Congress to make big changes to the 2010 banking law won’t be easy. While House Republicans, led by Jeb Hensarling, chairman of the House Financial Services Committee, is working on a measure that would rip apart most of Dodd-Frank, the Senate Banking Committee hasn’t proposed its own version. Most legislation would require support from at least some Democrats in the Senate to avoid filibuster rules, unless lawmakers try to attach parts of it to a fast-track budget process.
Asked whether Trump would seek to change Dodd-Frank through legislation or executive action, the president’s spokesman, Sean Spicer, offered no clarity. He told reporters Monday in Washington that Trump would "continue to work with Congress" on changing ...
New York Times
Republicans’ Paths to Unraveling the Dodd-Frank Act
President Trump took aim at financial regulations and other federal rules on Monday, signing an executive order to trim back the federal regulatory thicket and promising to do “a big number” on Obama-era Wall Street restrictions.
At the same time, congressional Republicans opened their own front against the Dodd-Frank Act, the law that overhauled financial regulation after the 2008 financial crisis. And with Mr. Trump in the White House, Republicans who previously challenged Dodd-Frank now see success in their sights after years of futility.
“Dodd-Frank is a disaster,” the president declared during a 10-minute session with reporters as he signed an unrelated executive order that could reduce other types of government regulations.
“We’re going to be doing a big number on Dodd-Frank,” Mr. Trump added. “The American dream is back.”
In reality, the president cannot unravel Dodd-Frank with a stroke of a pen, and congressional Republicans will find it easier to chip away at the law than to repeal it altogether.
Defanging Dodd-Frank, a sweeping law that created a consumer protection agency and reined in mortgage practices and derivatives trading, would also seem to contradict Mr. Trump’s anti-Wall Street language from the campaign trail. His closing campaign ad, which lamented a “global power structure” and a “corrupt machine,” flashed an image of Lloyd C. Blankfein, the chairman and chief executive of Goldman Sachs.
But the president has spoken out against Dodd-Frank, claiming that eliminating it would benefit working people, even as he stocks his administration with former Goldman executives and billionaires.
His allies in Congress began their legislative assault on Dodd-Frank on Monday, introducing a measure to repeal a Securities and Exchange Commission regulation that requires oil companies to publicly disclose payments they make to governments when developing resources around the world. The regulation was tangential to Dodd-Frank’s mission of reforming Wall Street but was included as a bipartisan effort intended to shine a light on potential bribes.
Republicans argue that the rule puts American companies at a disadvantage; the House Financial Services Committee has called it a “politically motivated mandate.” And the rule has some powerful opponents in the industry, including Exxon Mobil and, according to one account, its former top executive, Rex W. Tillerson, Mr. Trump’s pick for secretary of state.
The legislation to repeal the rule, introduced by Representative Bill Huizenga of Michigan and advanced to the House floor by the rules committee on Monday, has a good shot of becoming law thanks to an obscure parliamentary procedure. Under the Congressional Review Act, passed in 1996, Congress has a limited window to undo newly finalized regulations using only 51 Senate votes, rather than the normal 60 needed to overcome a filibuster. Republicans hold a majority in both chambers, all but guaranteeing them success.
This effort is just the beginning. House Republicans are also moving bolder legislation that would repeal crucial provisions of Dodd-Frank, including the so-called Volcker rule, which prevents banks from making risky bets with their own money. And they are exploring ways to use the budget process to potentially defund some of the law’s most contentious provisions.
Still, each strategy has its limits. The House legislation to repeal Dodd-Frank could stall in the Senate, where it needs 60 votes. And even though the Congressional Review Act requires only a majority of lawmakers to repeal a rule, only 10 or so Dodd-Frank rules are vulnerable to this process.
“It is the height of hypocrisy for Republicans to now be wasting time attacking rules signed by the former president, which went through a rigorous vetting process,” said Representative Louise M. Slaughter of New York, the top Democrat on the rules committee.
Even the president’s latest executive order could have a minor impact.
The order says each new rule must be offset by regulatory cuts that save at least twice as much money. It also instructs the Office of Management and Budget to set annual limits on the total cost of rules issued by each department. For the current year, the limit is set at zero.
“This will be the largest cut ever, by far, in terms of regulation,” Mr. Trump said hyperbolically.
But the order does not apply to independent agencies like the Federal Reserve and the Consumer Financial Protection Bureau, limiting its effect on financial regulation. Independent agencies could choose to comply but are unlikely to do so while under the leadership of people appointed by President Obama.
In addition, the order includes a broad exemption for “emergencies and other circumstances.”
Despite the obstacles, there are a number of different tactics that Republicans can use to try to dismantle Dodd-Frank.
Congressional Review Act
Dodd-Frank opponents owe Newt Gingrich a debt of gratitude.
The Congressional Review Act, passed some 20 years ago as part of his Contract With America, provides lawmakers at least 60 days to introduce legislation disapproving major new regulations. The lawmakers can ultimately repeal the regulations with support from just a majority of lawmakers and the president. The Congressional Research Service has determined that rules sent to Congress on or after June 13 of last year are vulnerable to repeal.
Until now, the Congressional Review Act was not much of a weapon. It has led to a repeal measure being signed into law only once, in 2001, when Republicans and President George W. Bush wiped out workplace safety regulations adopted near the end of President Bill Clinton’s administration.
But Republicans have identified dozens of potential rules to override, some of which arose from Dodd-Frank, according to congressional documents reviewed by The New York Times.
Republicans can target a derivatives rule adopted last year by the Commodity Futures Trading Commission, a Consumer Financial Protection Bureau rule for prepaid debit cards and a rule approved by banking regulators that imposed capital requirements for banks that trade derivatives. The threat also applies to any unfinished rules that the consumer bureau completes, including its looming crackdown on payday lending.
The S.E.C. oil-payment rule is the first of five Obama administration rules scheduled to be challenged this week. The House rules committee advanced the legislation to repeal that rule on Monday over the objections of the panel’s Democrats, who argued that Republicans were misusing the Congressional Review Act to undermine Dodd-Frank.
The oil-disclosure policy has already had a tortured history. The S.E.C. completed the rule in 2012, with the support of antipoverty groups like Oxfam and the One Campaign, but the American Petroleum Institute, the trade group representing Exxon Mobil and other oil companies, sued the agency and won.
In 2013, a federal judge in the District of Columbia vacated the rule. It took the S.E.C. another three years to redo the rule, which it finally did in June of last year, opening it to Republican attack under the Congressional Review Act.
“What they’re doing is responding to a narrow interest within the industry that is trying to be secretive,” said Senator Benjamin L. Cardin of Maryland, the top Democrat on the Senate Foreign Relations Committee, who sponsored the amendment in Dodd-Frank along with former Senator Richard Lugar, a Republican.
If the Congressional Review Act is a scalpel, then the Financial Choice Act is a sledgehammer.
The legislation, introduced last summer by Representative Jeb Hensarling, the chairman of the House Financial Services Committee, represents the most comprehensive response to Dodd-Frank yet.
The bill would repeal the Volcker rule as well as the so-called Durbin amendment, which set a limit on fees retailers are charged for debit card transactions. It would replace Dodd-Frank with a more flexible regulatory structure.
After a false start under President Obama, Mr. Hensarling’s plan to repeal and replace Dodd-Frank could gain new life from Mr. Trump.
“Republicans on the Financial Services Committee are eager to work with the president and his administration to unclog the arteries of our financial system so the lifeblood of capital can flow more freely and create jobs,” Mr. Hensarling said in a statement.
He hopes to pass the bill this year — with his committee expected to take it up in the coming weeks — but that is no sure thing.
For one thing, the deep-pocketed banking lobby is not unanimous in its support of Mr. Hensarling, a Texan with a populist streak whose plan is arguably more geared toward small banks than big ones. Many of the biggest banks, creatures of habit that have already adjusted to much of Dodd-Frank, would prefer specific accommodations, rather than wholesale repeal of the law.
Mr. Hensarling’s plan would also need to merge with legislation offered by Senate Republicans. And even then, they would need some Democrats to reach 60 votes.
House Democrats have vowed to fight Mr. Hensarling.
“This bill is so bad that it simply cannot be fixed,” Representative Maxine Waters of California, the top Democrat on Mr. Hensarling’s committee, said of his bill last year.
If his straightforward legislation stalls, Mr. Hensarling may find comfort in the minutiae of the budget reconciliation process.
In the next six weeks or so, his committee is required to submit its “budget views” for 2018 to the House Budget Committee. In this document, Mr. Hensarling is expected to recommend a number of measures that could rein in some core aspects of Dodd-Frank.
For example, he will most likely recommend replacing regulators’ authority to wind down troubled banks with a new chapter of the bankruptcy code. He also could tinker with the funding for two bodies that Republicans love to hate: the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, a collective of regulators who monitor threats to the financial system.
By subjecting these bodies to the congressional appropriations process, rather than a dedicated funding mechanism, Congress may be able to cut their funding.
It is unclear whether this plan will gain traction with congressional leaders.
While Congress is busy fighting Dodd-Frank, the Trump administration’s financial regulators may prove that less is more.
Wall Street is hoping that with new leaders at the S.E.C. and the Commodity Futures Trading Commission, regulators may allow some leeway for violations of the Volcker rule and other regulations.
And while most of Dodd-Frank has been completed, there are rules left to set, including restrictions on executive compensation. Under the Trump administration, those rules may remain unfinished business.
Stacy Cowley, Emmarie Huetteman and Glenn Thrush contributed reporting.
New York Times
Fannie, Freddie and the Secrets of a Bailout With No Exit
When Washington took over the beleaguered mortgage giants Fannie Mae and Freddie Mac during the collapse of the housing market and the financial crisis of 2008, it was with the implicit promise that they would be returned to shareholders after being nursed back to health.
But now, with the unsealing of documents this week that were produced as part of a lawsuit filed against the government, new evidence is coming to light on how intimately the White House was involved in the Treasury’s decision in August 2012 to keep all the companies’ profits for the government. That move effectively maintained Fannie’s and Freddie’s status as wards of the state.
The newly released documents go beyond previous disclosures in the case and make clear that the Obama administration never had any intention of restoring Fannie and Freddie, which enjoyed implicit backing from the
The documents also show the Treasury moving to modify the terms of the mortgage finance giants’ $187.5 billion bailout shortly after a July 2012 meeting when the Federal Housing Finance Agency, Fannie’s and Freddie’s regulator, learned that they were about to enter “the golden years” of profitability.
Since then, Fannie and Freddie have returned to the Treasury over $50 billion more than they received in the bailout. But the amount they owe to the government remains outstanding.
The new materials cast further doubt on arguments made in court by government lawyers that the profit sweep came about because Fannie and Freddie were in a death spiral and taxpayers needed protection from future losses. Documents unsealed last month also served to undermine that legal stance.
A Justice Department spokeswoman declined to comment.
The trickle of documents comes years after Fannie and Freddie shareholders sued the government, contending that its decision regarding the companies’ profits was illegal. Defending against an array of these suits, lawyers for the Justice Department have requested confidential treatment for thousands of pages of materials. In a case brought in Federal Claims Court, the government’s lawyers asserted presidential privilege in 45 documents.
The Treasury’s integral role in the profit sweep comes through clearly in the new materials, indicating that it was in charge of decisions on Fannie and Freddie, and that the Federal Housing Finance Agency, created by Congress in 2008 as a purportedly independent regulator, did as directed.
In the law setting up the F.H.F.A., Congress required officials to ensure that the companies were operated in a safe and sound manner with an adequate capital cushion.
The profit sweep, the aggrieved shareholders contend, violated that part of the law because it barred the companies from being able to amass capital.
In a statement, Adam Hodge, a spokesman for the Treasury, said the profit sweep “ended the vicious cycle where Fannie Mae and Freddie Mac drew against Treasury’s backstop to pay the 10 percent dividend owed to taxpayers.”
The recent economic performance of both companies, Mr. Hodge added, further undermines complaints about the sweep because “the required dividends to taxpayers would have exceeded their income in five of the past six quarters.” Finally, he noted, the best way to end the conservatorship is through comprehensive housing finance reform legislation.
Preventing the companies from using their profits to rebuild a strong capital position was an explicit goal of the Obama administration, the newly unsealed materials show. In an email sent the day the profit sweep was announced, Mr. Parrott said diverting Fannie’s and Freddie’s profits would eliminate “the possibility that they ever go (pretend) private again.”
Sending a message to Fannie’s and Freddie’s shareholders that they should have no hope of profiting from the companies’ recovery appeared to be top of mind to Mr. Parrott, the documents show. In another email sent the day the sweep was disclosed, he assured Treasury officials that “all the investors will get this very quickly.”
In an email, Mr. Parrott later said that his comment about investors referred to those holding Fannie’s and Freddie’s mortgage-backed securities, who would recognize that the Treasury had addressed the problem of the companies drawing from the government to pay dividends owed to taxpayers. “I realize that you appear to want me to be referring to the G.S.E.s’ shareholders, but I am not,” Mr. Parrott said, a reference to government-sponsored enterprises.
Investors got the message. But some viewed the action as illegal and began filing lawsuits against the government.
Unlike shareholders of other bailout recipients, including Citigroup, Bank of America and even the insurer American International Group, Fannie and Freddie investors have not been able to participate in the rebound at the companies as their operations boomed.
Mr. Parrott, now a fellow at Urban Institute and owner of Falling Creek Advisors, a consultant to financial institutions, declined to comment on the matter.
The unsealed documents indicate an intense desire to get rid of Fannie and Freddie as independent entities once and for all. They do not show any concern among Treasury officials that their actions on the profit sweep might violate the law.
Only a small portion of the materials produced in the case in Federal Claims Court has seen the light of day. Approximately 50 documents were released on Wednesday to lawyers representing Arnetia Joyce Robinson, an individual investor who sued the government in Federal District Court in Kentucky last October.
According to that lawsuit, Ms. Robinson, a retired bank manager and loan officer, bought Fannie and Freddie shares in September 2008 to help fund her retirement.
Ms. Robinson’s suit is one of several that have been filed by investors, some of them giant institutions and speculators in Fannie and Freddie who bought shares after the bailout, contending that the government’s profit sweep was illegal. One case from 2013 was brought under the Administrative Procedure Act, which governs actions taken by government agencies.
Royce C. Lamberth, the district court judge overseeing the 2013 suit, dismissed it in September 2014, but the case is on appeal. In dismissing the complaint, Judge Lamberth seemed to rely on the government’s contention that Fannie and Freddie were in a death spiral.
But the documents released on Wednesday indicate that the financial projections for Fannie and Freddie the judge received were significantly out of date. These projections, showing large losses in the near term, were produced to the court by the Treasury in a document dated June 2012, but they actually contained figures from September 2011, when the companies’ operations had not yet begun to turn around.
Those projections, produced by Grant Thornton for the Treasury to use in valuing its investment in Fannie and Freddie, did not account for improvements in the housing market that took place in late 2011 and early 2012. As the unsealed materials show, Treasury officials knew in the summer of 2012 that Fannie and Freddie had turned the corner and appeared to be well on their way to a strong recovery.
Experts disagree about what the government’s role in housing should be and whether Fannie and Freddie should be wound down, replaced by some sort of new mortgage finance guarantee.
The significance of these documents, however, goes well beyond the future of housing finance. They demonstrate the perils of allowing the government to act in secrecy. In asking for confidentiality surrounding its actions, the government argued that the release of such documents would roil the financial markets. What seems clearer all the time is that their release will instead help the public understand what the government did here and why.
New York Times
Trump Treasury May Mean Independence for Fannie and Freddie
Steven Mnuchin, President-elect Donald J. Trump’s nominee to run the Treasury Department, electrified Fannie Mae and Freddie Mac shareholders on Wednesday when he signaled that the mortgage finance giants would finally be allowed to get out from under Washington’s thumb.
“We got to get Fannie and Freddie out of government ownership,” he told Fox Business. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.”
Mr. Mnuchin is right. It has been more than eight years since the federal government took over Fannie and Freddie in the mortgage crisis; as such, they are the last big piece of unfinished business from that era.
When the government changed the terms of their bailouts in the summer of 2012 and began expropriating all of Fannie’s and Freddie’s profits every quarter, it seemed as if that unsatisfactory setup would go on forever. After all, it is hard for the government to give up a honey pot that has returned over $60 billion more to the Treasury than the companies received from taxpayers during their troubles.
Granted, Mr. Mnuchin said little about how the administration thinks the nation’s biggest “government-sponsored enterprises” should be structured. That is not surprising, given the complexity of the $6 trillion mortgage market.
So why did Mr. Mnuchin’s comments jazz the markets? Because they revealed a seismic shift in the way these companies are viewed by the new administration. In place of the strident, anti-G.S.E. ideology that has dominated the conversation on both the left and the right since the bailout, it looks as if a more pragmatic and positive approach to the companies and their role in the mortgage market is on the way.
What that means, in my view, is that the enterprises may be allowed to live a new day rather than continue to be diminished and drained of their profits.
This is good news indeed for small lenders who rely so heavily on Fannie and Freddie to buy the mortgages they underwrite, freeing them to repeat the process rather than hold the loans on their balance sheets. And when small lenders benefit, borrowers do, too, by having more choices.
As executive director of the Community Mortgage Lenders of America, Glen S. Corso represents many of the small entities that depend on the liquidity provided by Fannie and Freddie to make their loans. He said in an interview that he and his Main Street constituents were extremely encouraged by the comments from Mr. Mnuchin.
“Since 2012, we’ve been advocating for the G.S.E.s to be reformed, recapitalized and then released from conservatorship,” Mr. Corso said. “We’re hopeful that is the direction the Trump administration will head in.”
That would be an almost total turnabout from the proposals pushed in recent years by housing officials under President Obama and some influential lawmakers. Railing against recapitalizing the companies and releasing them from conservatorship, they have put forward an array of complicated and impractical proposals that would have reconfigured the mortgage market and, in some cases, handed over a big chunk of it to the nation’s largest banks.
Although there was not much talk of Fannie and Freddie on the campaign trail, it was widely assumed that a Clinton administration would embrace some of those Obama housing officials as well as their ideas.
That those officials now have little sway is one reason shares in Fannie and Freddie soared in value just after the election and even before Mr. Mnuchin spoke about the companies.
As a former head of the mortgage-backed securities desk at Goldman Sachs, Mr. Mnuchin well understands the mechanics of this enormous market. He also recognizes the significant role a well-capitalized Fannie and Freddie could play in ensuring that borrowers have access to mortgage money in good economies as well as bad.
So what might happen now? In his comments, Mr. Mnuchin nodded to a crucial issue regarding Fannie and Freddie: safety and soundness. “We’ll make sure that when they’re restructured, they’re absolutely safe and they don’t get taken over again,” he said, “But we got to get them out of government control.”
A first step in ensuring that Fannie and Freddie are safe would be to let them rebuild their capital. Since the government began taking all their profits in 2012, it has directed the companies to operate on a small and shrinking sliver of capital. Under the current arrangement, the companies will have zero capital at the end of 2018.
This is clearly untenable and unsafe for taxpayers, who would again be on the hook if Fannie and Freddie began losing money.
An easy way to let them rebuild capital would be to end the quarterly transfer of all their profits to the Treasury. This would not require legislation; it could be done administratively with incoming Treasury officials advising the Federal Housing Finance Agency, which regulates Fannie and Freddie, to change the terms of the government’s agreement with the companies. This was supposed to happen anyway while the companies were operating under the conservatorship.
What of the fears that if they are allowed to recapitalize, the companies will return to their swaggering, prebailout ways and grow powerful and reckless as they did in the 1990s?
Mr. Corso and others say safeguards are in place to protect taxpayers from such an outcome.
“We would be the first to acknowledge that there were serious deficiencies in the way the G.S.E.s operated, pre-2008,” he said. “But a lot have been addressed in the conservatorship.”
Simply recapitalizing the companies will also be cleaner, preventing potential self-dealing and the giveaways of the companies’ assets that existed in some of the privatization proposals.
There is another intriguing aspect to the Trump administration’s shift, and it has to do with the lawsuits that have been filed against the government. One such suit was brought by Fairholme Funds, a mutual fund company that owns Fannie and Freddie shares. It contends that the 2012 profit sweep was an improper taking of private property without just compensation.
For years, Justice Department lawyers have been stonewalling document requests from the plaintiffs. The government has requested confidential treatment for thousands of pages of materials and has asserted presidential privilege in 45 documents.
Margaret Sweeney, the judge hearing the matter in the Court of Federal Claims, recently opened the door a crack, letting some documents see the light of day. Some of the materials cast doubt on arguments made by the government’s lawyers that the profit sweep came about because Fannie and Freddie were in dire condition and the taxpayers needed protection from future losses.
If Judge Sweeney were to order the release of more documents, the current administration would probably appeal. It is not as clear that a Trump administration would do so, however. This opens the possibility that all those materials that the Obama administration has fought so hard to keep secret might just emerge.
That would be a huge service for anyone interested in holding government officials accountable for their actions.
J.P. Morgan Chase's $55 Million Discrimination Settlement
A claim filed on Wednesday alleges that the bank charged black and Hispanic homeowners higher rates for mortgages, amounting to "tens of millions" of dollars of illegal charges.
Gillian B. White
On Wednesday, the U.S. attorney for the Southern District of New York, Preet Bharara filed a lawsuit against J.P. Morgan Chase alleging that the bank had engaged in discriminatory mortgage practices from 2006 through 2009. According to the complaint, the bank is responsible for brokers charging black and Hispanic borrowers higher rates for mortgages than white borrowers with similar credit profiles. According to the lawsuit, higher interest rates resulted in, on average, an additional $968 of charges for Hispanic borrowers and an additional $1,126 in charges for black borrowers during the first five years of the loan. Bharara and his office estimate that over the three-year period, the disparities in loan terms resulted in around 53,000 black and Hispanic borrowers being charged “tens of millions” of dollars more for home loans than white borrowers.
The allegations of discrimination center around JP Morgan’s wholesale-mortgage practice, which the bank shuttered in 2009. Wholesale mortgages occur when the bank uses smaller mortgage-broker firms as subcontractors to vet borrowers and offer loan terms. The mortgage broker assesses credit and offers loan terms—including pricing—then hands the loan applications over to a bank for funding.
The U.S. attorney found that J.P. Morgan Chase allowed mortgage brokers to vary the interest rate they charged customers based on factors other than creditworthiness—something that isn’t uncommon in wholesale-banking agreements where brokers can increase rates based on a number of application factors. Brokers make money on these loans through fees charged on the loan itself, but also based on something called the yield-spread premium, which occurs when the rate on a loan is higher than the rate designated by the bank based on creditworthiness alone. In other words, brokers had a financial incentive to increase interest rates within the parameters allowed by their bank agreement (there is usually a limit to how much more brokers can charge for differing loan factors) in order to get paid more from a loan. But in J.P. Morgan Chase’s case, the lawsuit claims, the discretion given to mortgage brokers resulted in higher rates being charged on the basis of race and ethnicity, which is federally prohibited.
While the brokers might have been the bad actors in this case, Bharara and his office find that J.P. Morgan Chase had a legal responsibility—and the available data—to determine whether pricing discretion was being used in violation of the law. In their complaint, Bharara and his office note that “there were less discriminatory alternatives available to J.P. Morgan Chase than these policies or practices.” Those efforts might have included more robust auditing of pricing practices and explicit instructions that discrimination based on race and ethnicity wouldn’t be tolerated. The failure of J.P. Morgan Chase to adequately monitor the pricing practices of their brokers, and to prevent or remedy practices that resulted in racial and ethnic discrimination, violates both the Federal Housing Act and the Equal Credit Opportunity Act, the Justice Department alleges. (Bharara’s office declined to comment for this article)
Though J.P. Morgan Chase denies allegations of wrongdoing, The Wall Street Journal reported on Wednesday that the bank had agreed to pay $55 million to settle the claim just hours after the lawsuit was filed. In a statement, a spokesperson for J.P. Morgan Chase explained that the bank had "agreed to settle these legacy allegations that relate to pricing set by independent brokers." The money will likely be used to fulfill the lawsuits request for civil damages and compensation of borrowers who suffered monetary damages as a result of the bank’s mortgage practices.
$13 billion JPMorgan settlement sends nearly $300 million to CalPERS, CalSTRS
The federal government on Tuesday announced its much anticipated JPMorgan Chase settlement, in which the nation’s largest bank agreed to pay $13 billion in reparations and admit that it peddled fraudulent securities. As part of the settlement, California’s two largest public employee pension funds will receive nearly $300 million
The federal government on Tuesday announced its much-anticipated JPMorgan Chase settlement, in which the nation’s largest bank agreed to fork over $13 billion in reparations and admit that it peddled fraudulent securities.
As part of the settlement, California’s two largest public employee pension funds will receive nearly $300 million. Billions also will be set aside to help homeowners still struggling from the effects of the worst economic downturn since the Great Depression.
The announcement came from U.S. Attorney Benjamin Wagner in Sacramento and U.S. Attorney General Eric Holder in Washington, D.C.
“It is the federal government’s largest single-company civil settlement ever,” Wagner said at a news conference in his Sacramento office.
Wagner was a key player in the settlement, partially due to a year-old investigation of JPMorgan by four attorneys on his staff. That, plus the office’s aggressive pursuit of rampant mortgage fraud in the Central Valley, led to high-ranking Justice officials allowing Wagner to carry the ball in a high-profile Wall Street investigation.
He noted Tuesday that, from the early 2000s through 2008, JPMorgan was not the only bank to engage in the type of misconduct it has now acknowledged. However, Wagner said, the bank’s actions are “symptomatic of the recklessness on Wall Street which led to the financial crisis in 2008.”
The acknowledged facts include some relating to the same type of fraudulent conduct by employees of two other banks, Bear Stearns and Washington Mutual, before JPMorgan acquired them in 2008.
The bank knowingly bought up thousands of residential mortgage-backed loans that were “non-compliant with applicable underwriting guidelines” and packaged them as securities, Wagner said. “It promoted its supposedly robust due diligence through prospectuses,” but there was a “wide disparity” between the message of those marketing tools and what bank officers actually learned from the due diligence process, he said.
Billions of dollars in non-prime securities were backed by mortgage loans secured by properties with inflated appraisals, supported by inaccurate loan-to-value or debt-to-income ratios, or were “originated in violation of federal and state laws and regulations,” Wagner said.
“Some of the loans had no value at all,” he added.
“JPM injected this bad paper into the securities market, with negative consequences to the world economy,” he said. “The impacts were staggering. Credit unions, commercial banks and many other victim investors across the country, including some in (California), suffered billions of dollars in losses.”
Wagner’s office is still in the midst of a criminal probe of JPMorgan, but he would not offer any details.
Wagner did say the civil investigation turned up evidence going to the culpability of some bank supervisors and managers who made critical decisions regarding the purchase of toxic loans and their sale to unsuspecting investors as sound securities.
He also said that, as part of the civil settlement, JPMorgan agreed to fully cooperate with the criminal investigation. He said he had some of his top white-collar-crime prosecutors working on it.
The civil probe was conducted by Assistant U.S. Attorneys Rich Elias, Colleen Kennedy and Kelli Taylor, with David Shelledy, chief of the office’s civil division, “helping to finalize this settlement agreement,” Wagner said. The four attorneys flanked him at the news conference.
“I would not be here making this announcement, and it is quite possible that this settlement would never have happened, were it not for their outstanding work,” he said. “Their work resulted in the collection of some compelling evidence, which ultimately led to the settlement.”
Both big and small institutional investors will share in the pot of money. The investors bought the securities based on the deliberate misinformation propagated by JPMorgan, Wagner said.
The California Public Employees’ Retirement System and the California State Teachers’ Retirement System – more commonly known as CalPERS and CalSTRS – will draw $298,973,000 in damages: about $261 million to CalPERS and $19.5 million plus interest to CalSTRS, with a share of the remainder going to the California attorney general’s office for fees.
“JPMorgan Chase profited by giving California’s pension funds incomplete information about mortgage investments,” state Attorney General Kamala Harris said Tuesday in a statement.
The settlement “helps bring closure and justice in this matter for those who were harmed, and it holds JPMorgan accountable for its actions,” CalPERS investment committee chairman Henry Jones said in a statement.
The bank will pay $7 billion to various federally insured investors and to four other states to resolve their claims.
In addition, JPMorgan has agreed to spend $4 billion by the end of 2016 on a package of consumer-relief measures that will benefit hard-pressed homeowners who are underwater on their mortgages. One facet of the program will make new loans available to low- and moderate-income borrowers. Another facet will help address blight in urban neighborhoods that were devastated by the economic meltdown.
The bank will also pay $2 billion to the Justice Department to resolve potential civil claims by Wagner’s office. It is the largest civil penalty ever assessed against a bank for unsound mortgage-backed securities.
Holder said in a statement: “The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over.”
(1) "For Shame," Badlands Journal, Oct. 24, 2007.