In a little over two years as Pennsylvania's banking secretary, A. William Schenck 3d has set an activist tone on the related issues of predatory lending and mortgage fraud.
One of his more ambitious proposals is that the state legislature authorize his Department of Banking to go public with complaints against nonbank lenders when the department sees "a pattern" of abuses - even before it has taken enforcement actions.
His counterparts in other states say they hesitate to release such information before taking enforcement actions. But Mr. Schenck, a former banking executive, said, "I want to have the ability to tell consumers that it's happening."
The proposal was one of many included in a report his agency released this month. Most of the other suggestions, such as toughening penalties for inflated appraisals and giving him the power to license individual mortgage brokers and loan officers, also require the Pennsylvania General Assembly to amend the law.
But Mr. Schenck is not sitting idly by. In the next 90 days or so, he said, he plans to "put forth a series of policies which will outline what we will define as dishonest, fraudulent, unfair, and illegal practices," and which his examination team will "treat as law" until the department converts them into actual regulations.
To enhance his department's policing ability, Mr. Schenck has boosted his department's staff almost 50%, to 150, and with this year's budget he expects to have 174 staff members in place. He has also doubled the number of examiners who focus exclusively on Pennsylvania's more than 15,000 nondepository institutions.
"You can have all the consumer protection laws in the world, but if you don't have the ability to enforce them, those laws don't have value," he said.
Mr. Schenck has also created an investigation unit that has four staff members now and should have 11 staff members in the next eight months. Its job, he said, is, to put together cases, pursue civil cases, impose fines, take away licenses, and "package" cases for the state's attorney general to pursue.
He said he wants to work "closely with state police so we can do real-time, close background checks" on the companies his agency licenses.
Mr. Schenck, who started his job in January 2003, said that "it became obvious fairly early on there was kind of an empty place in Pennsylvania" in banking regulation.
No government organization "took the primary responsibility for helping consumers with issues of financial abuse," he said. "There were certainly people in Pennsylvania who were working on it, but not as a primary focus. We said, 'We need to fill that gap.' "
Nonetheless, he admits he got some prodding.
"Whenever you get into a government job, people come and talk to you. I began to hear from a lot of consumer groups about financial abuse issues," he said.
The more he heard about people's problems with predatory lenders, and the more complaints the Pennsylvania Housing Finance Agency's call center received, the clearer it became that the state's "very high level of foreclosures" could be due in part to abusive lending practices, Mr. Schenck said.
Pennsylvania has the ninth-highest foreclosure rate for prime loans and the fourth-highest in subprime loans, according to the Mortgage Bankers Association. "I've taken the position that it's our job to reduce those … [abusive] practices and reduce the level of foreclosures," Mr. Schenck said.
He said most of the problem involves subprime loans. Depending on the lender his department looked at, 60% to 75% of the company's loans in the state that were in foreclosure were subprime.
"In many ways the subprime business has been an excellent business for helping people get in houses," he said. "Plenty of people in houses in Pennsylvania and in the country today are making their payments" and "wouldn't be there if it weren't for subprime lending."
Mr. Schenck ran Fleet Mortgage from 1997 to 2000, when he left to head I-Escrow Inc., a San Diego dot-com, until it was sold in 2001.
He said his background in mortgage lending tells him that while "the majority of the people in the business of lending money to consumers are in the relationship business, meaning that they want consumers to come back again and want people to refer their friends and neighbors," others are not.
"There is a different business model out there for a small percentage of people in the loan business," he said. These firms' attitude is, " 'I, the lender, am in the business for my bottom line, period. I'm not going to see my customer again, and I am going to get the most money from this family as I can. Whether the loan fits or not doesn't matter, what matters is the fee.' That's where predatory lending starts."
Then again, Mr. Schenck conceded that many national lenders bought fraudulent loans in the Poconos, which a few years ago was the center of a massive real estate fraud caused in part by appraiser inflation of home values, sometimes by more than 100%.
It remains to be seen how much of Mr. Schenck's agenda - particularly his legislative proposals - will take hold. Take, for instance, the notion of making complaints about lenders public before any punitive actions are taken.
Gavin Gee, the director of the Idaho Department of Finance, said he does not make consumer complaints public until after he has taken an enforcement action against a company "for a very good public policy reason."
"Not all complaints are legitimate, and we've always erred on the side of caution" in publicizing complaints, he said. Each year his agency releases a report categorizing complaints by industry.
Similarly, the New York Banking Department sometimes releases information about parties it investigates - but only after it takes enforcement actions, for fear of compromising its investigations, a spokeswoman said.
In other respects Mr. Schenck wants to be on the same page as his peers. The Idaho agency licenses individual mortgage originators.
The New York agency has had a criminal investigations bureau for years to pursue those who commit fraud or predatory lending or other abuses. Mr. Gee of Idaho plans to almost double his consumer finance bureau, to about 14. He has examiners and in-house deputy attorneys general do the work and calls investigations units a matter of semantics.
Mr. Schenck is paying close attention to the latest federal anti-predator legislation. That bill, introduced in the House of Representatives a couple of weeks ago by Pennsylvania Democrat Paul Kanjorski and Ohio Republican Bob Ney, could preempt Mr. Schenck's proposed measures.
He said Mr. Kanjorski has assured him that "he wants states to have the ability to enforce this legislation." But, Mr. Schenck said, "To think that people from Washington, D.C., or some office in Texas … can have the same level of concerns about Pennsylvania consumers that we in Pennsylvania can have is not realistic."
