WASHINGTON — In reaction to the ongoing crisis in the mortgage markets, the Office of Thrift Supervision has launched a campaign to become the chief federal regulator for nonbank mortgage companies.
The idea has divided bankers, consumer groups, and state regulators. Some argue that the agency is best suited for the role, but others see the campaign as a power grab.
While it remains unclear if lawmakers will respond to the agency’s request, OTS officials have said they hope the mortgage reform bill expected to be voted on this week by the House Financial Services Committee will eventually include a provision giving them the added authority.
“We want to see a level playing field, and … we simply believe that we present a good option for Congress to consider,” Scott Polakoff, the agency’s senior deputy director and chief executive officer, said in an interview last week. “We just have some skills that we think would fit nicely on this.”
The agency began the campaign in September by saying that, if asked, it would be happy to regulate nonbank mortgage companies. But OTS Director John Reich took the effort up a notch during a House Financial Services hearing late last month, saying that he believed his agency — and not the Department of Housing and Urban Development, as called for in Chairman Barney Frank’s mortgage reform bill — would be best suited for the role.
“The OTS has extensive expertise in overseeing and supervising mortgage banking operations that I believe would benefit the current mortgage banking market,” Mr. Reich said at the hearing.
The bill would call for states to enforce its origination standards but would give HUD the right to step in if state enforcement is weak.
Mr. Polakoff said the OTS is better equipped for that role. Its plan would have the states and the agency share responsibility for nonbank mortgage lenders (the OTS is not seeking to regulate brokers) by coordinating or alternating examinations depending on the institution’s size.
For many bankers, the idea has a certain appeal. They say that giving the OTS oversight would ensure that nonbank mortgage lenders are subject to many of the same standards as banks and thrifts. Bankers worry that the plan would raise exam fees, but Mr. Polakoff said depository institutions would not fund the expansion. Instead, he said, the agency would charge nondepository lenders exam fees, just as it does for thrifts.
Diane Casey-Landry, the president of America’s Community Bankers, said the OTS may be more capable to handle the increased oversight than HUD.
“If you look at it just on paper in terms of what … [HUD] was created for, it seems appropriate. However, if you contrast it with what they’ve been able to accomplish, it may be more than they can handle,” she said.
Some argue that HUD is already overtaxed and cite its handling of the Real Estate Settlement Procedures Act. The department has the authority to implement the mortgage origination disclosure law but has not broadly updated it since it was enacted in 1974, despite repeated attempts. HUD had been expected to send an update to the Office of Management and Budget Friday and hopes to finalize it by mid or late 2008.
But Brian Gardner, an analyst at KBW Inc.’s Keefe, Bruyette & Woods Inc., said giving the OTS the authority rather than HUD may not have much appeal politically.
“Democrats view HUD to be more in line with Democratic views on consumer protection than the banking agencies,” he said. “I would think they would be more in line to leave it at HUD [in the bill] than spread it out over bank agencies.”
A HUD spokesman said the agency had not looked at the bill closely enough to comment on it.
Kurt Pfotenhauer, the Mortgage Bankers Association’s chief lobbyist, showed no preference for either regulator having the role, saying “both are qualified if asked.”
But consumer groups and state regulators say that they would prefer Rep. Frank’s bill the way it is, and that any added federal oversight should rest with HUD.
John Taylor, the president of the National Community Reinvestment Coalition, said such oversight fits better with HUD’s mission than the safety-and-soundness focus of the OTS.
HUD “has more of a mission to respond to consumers and consumer housing needs, whereas the OTS has a multitude of regulations it enforces, of which one of them would be this,” Mr. Taylor said. “Our past experience” dealing with the OTS “has been their lack of commitment to the fair-lending portion” of their mission. “The mission of HUD doesn’t change.”
John Ryan, executive vice president of the Conference of State Bank Supervisors, said the state regulators that oversee the 90,000 mortgage companies would not welcome the OTS offer.
State regulators have “made all these efforts, invested all these energies in this, and the only focus that we saw at the federal level was to preempt our predatory lending standards,” Mr. Ryan said. “Then to try to take advantage of this situation in a way to expand an agency’s mission just doesn’t play well in those states.”
Though OTS officials argue that their experience with the traditionally mortgage-focused savings and loans makes them the right agency to oversee mortgage companies, Mr. Ryan says it lacks the experience to oversee such firms.
“There’d be challenges in just implementing it and regulating this universe,” he said. “Just getting up to speed would take a considerable amount of time. I don’t see it gets us there as fast as some other things could.”
Some observers also cast doubt on the reasons behind the campaign. They said the OTS is simply trying to expand its mission as the Treasury Department conducts a study on the future of financial regulation that could include recommending the agency’s elimination.
“The thrift charter has been under attack for a while in the marketplace and on the Hill,” Mr. Gardner said. “There is a little politicking going on in order for the OTS to save itself.”
But Mr. Polakoff denied any such motive.
