Nicolas Bagley has written a very good op-ed in the Washington Post of January 25 that describes how the Bush Administration, key Democrats on the Hill and the banking community destroyed the ability of state government to protect its citizens from predatory fraud.   He has also written a longer article in Slate.

Here are the key provisions:

".....Enter the feds. Some of the biggest players in the secondary mortgage market are national banks, and the states' efforts to curb predatory lending clashed with banks' fervent desire to keep the market rolling. So the banks turned to the Treasury Department's Office of the Comptroller of the Currency. The primary regulatory responsibility of the OCC is ensuring the safety and soundness of the national bank system, but almost its entire budget comes from fees it imposes on banks, which have the option of incorporating under state law. Put another way, the agency's funding depends on keeping the banks happy. Little surprise, then, that the OCC acted when the national banks asked it to preempt subprime-mortgage laws such as Georgia's, arguing that they conflicted with federal banking law.

Despite the banks' thin legal arguments, the OCC issued regulations in early 2004 nullifying the state laws as they applied to national banks. The agency reasoned in part that the states just got it wrong. As the then-comptroller explained in a 2003 speech: "We know that it's possible to deal effectively with predatory lending without putting impediments in the way of those who provide access to legitimate subprime credit."

With the state laws nullified, national banks and their subsidiaries were free to engage in the practices the states were hoping to stamp out. (Indeed, Georgia scuttled its law because it didn't want to give national banks a competitive advantage over its state institutions.) Facing pressure from subprime lenders and Wall Street, and left without a real chance of holding investors responsible for purchasing ill-advised loans, state legislatures gave up on trying to meaningfully expose downstream buyers to liability for facilitating predatory lending.

In retrospect, the OCC's decision looks wrongheaded. What the agency took to be shortsighted consumer protection laws laden with hidden costs turned out to be prescient market-corrective reforms. It's impossible to know for sure, but had the state laws been permitted to go into effect, investors would probably be sitting on fewer subprime loans that will never be repaid.

The feds ignored the basic principle that no level of government has a monopoly on good policy. As federal officials move to clean up the subprime mess, it's worth remembering that they helped to create it."