WASHINGTON - Luke Hayden, an executive vice president at J.P. Morgan Chase & Co., wants to arrange a trade between subprime lenders and the federal government.
It would work this way: Subprime lenders would open their doors to periodic examinations by federal banking regulators, and the government, in turn, would exempt those who pass from compliance with state and local antipredator laws. "I think there are over 80 pieces of legislation in the works at the state level and the local level, and it makes it very cumbersome for us to make sure that we don't make a mistake," he said.
Mr. Hayden is also an executive vice president of Chase Manhattan Mortgage Corp., which expects to originate $4 billion of subprime mortgages and service $15.8 billion more this year.
The upside for the government would be a reduction in predatory lending practices, as borrowers would migrate toward lenders with a government seal of approval, he said. For the lenders, the incentive to submit to further regulation would be the elimination of the cost of complying with the constantly growing number of state and local ordinances.
"We care because of the cost issues but we also care because we think it is important that we weed out the predatory behavior," Mr. Hayden said. "So if you cause lenders to adhere to a higher standard, we think that would help resolve some of these really egregious problems that we see."
He presents the idea as a quid pro quo arrangement between lenders and the government, but in his company's case, the deal is all quo and no quid.
Examiners from the Office of the Comptroller of the Currency already scrutinize Chase Mortgage - a situation that the vast majority of its competition in the subprime market does not face.
Chase Mortgage is under OCC oversight because it is a subsidiary of Chase Manhattan Bank, which has a national charter. Most banking companies that have subprime lending operations house them in nonbank subsidiaries, which shields them from examination by bank regulators.
Morgan Chase staff conducted an internal survey of approximately 239 lenders in the subprime market and found that arrangements like its own are relatively rare.
"We cast our net fairly wide, and only 15% are routinely examined," Mr. Hayden said. "Raising the percentage of examinations, hopefully to 100%, would probably help resolve a number of these [predatory lending] issues."
Mr. Hayden is a nine-year veteran of the various banking companies that, through various mergers, became Morgan Chase. He left his post as the senior vice president in charge of market risk at Security Pacific Corp. in 1992, after the old BankAmerica Corp. bought it. He then joined Chemical Banking Corp., which acquired Chase Manhattan Corp. in 1996, adopted its name, and bought J.P. Morgan & Co. four years later.
Over the years he has come to the conclusion that the regulation of certain banking activities can give financial institutions a competitive advantage over nonbanks.
"There is value to routine examination of lending activities," he said. "I am not suggesting that you have to align your subprime lending unit with a bank subsidiary in order to accomplish that. In fact, what we have suggested to congressional staff is that they consider formulating legislation which creates a higher national standard that a lender can opt in to. Part of that higher standard is subjecting oneself to routine examinations.
"What I would love to see is some sort of Good Housekeeping seal of approval for subprime lenders," he said. "If you create a higher national standard, those who subscribe to that standard can broadcast that fact."
At least as important to Mr. Hayden as the status that a "seal of approval" would give is the relief that the other element of his plan would provide. An increasingly tangled web of state and local subprime lending laws is steadily raising the cost of large operators like Chase Mortgage.
"We are a nationwide lender," he said. "We have systems that need to be configured for the existing body of law in each locality that we do business in. We have to train our people on how to adhere to the law. It would be a whole lot easier and more cost-effective if we had a single standard."
In conversations with Capitol Hill staffers, Mr. Hayden said he has recommended creating an optional regulatory structure that lenders could join to avoid the myriad state and local laws.
"The idea is that instead of trying to configure your systems to worry about Chicago and Cook County and the State of Illinois, or North Carolina and Louisiana, or Los Angeles and California, you create a higher national standard," he said.
The institutions that opt for the higher standard would be subject to routine examinations of their lending practices, Mr. Hayden said. "I would suggest that that authority could easily be the OCC or the Fed. They have plenty of excess examiners these days."