Tags: fed | subprime | loans

Report: Fed Knew About Subprime But Failed to Act

Thursday, 01 Oct 2009 12:17 PM

By Julie Crawshaw

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The Fed was regularly warned about the subprime housing bubble beginning in 1999, when a coalition of Chicago community groups concerned about the growing prevalence of abusive mortgage lending started meeting with the Federal Reserve and other banking regulators, according to The Washington Post.

The groups presented research that showed large banking companies including Wells Fargo and Citigroup had created subprime businesses that focused solely on making high-interest rate loans, mostly in black and Hispanic neighborhoods.

Though the group’s evidence eventually led Illinois to file suit against Wells Fargo, it failed to move the Fed — which in 1998 had set a policy of refusing to police lenders’ compliance with federal borrower protection laws, freeing subprime lenders affiliated with banks from federal scrutiny.

"In the prime market, where we need supervision less, we have lots of it,” wrote former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, in 2007.

“In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision."

"It is like a city with a murder law, but no cops on the beat."

The Fed reversed that policy earlier this month.

Non-bank subsidiaries of bank holding companies and foreign banks will now be subject to the Federal Reserve Board’s routine consumer compliance review, Inside Mortgage Finance reports.

The new policy, designed to prevent a repeat of the subprime mortgage meltdown, also instructs Fed field staff to begin investigating consumer complaints against non-bank affiliates by next summer.

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