The lingering debate over the Dodd-Frank Act's financial reforms typically centers on what happens after the next financial crisis hits. In particular, many experts from across the political spectrum worry that it won't end the problem known as "too big to fail" - that the federal government still won't feel confident enough about the economic fallout to force one or more of our largest, most complex financial institutions into receivership much as the Federal Deposit Insurance Corp. routinely unwinds smaller banks.
Sen. Elizabeth Warren (D., Mass.) recently joined with Sen. John McCain (R., Ariz.) to address that problem by trying to avert it - by forcing the dismemberment of some of the mega-banks in question. The unlikely pair called for a return of the Glass-Steagall Act - the Depression-era law that walled off ordinary commercial banking, protected by FDIC insurance, from riskier investment banking. (Warren steadfastly defends that proposal, which echoes a stream of similar calls since the 2008 crash, in a CNBC video that you can view below.)
Warren, who formerly headed the panel charged with overseeing the Troubled Asset Relief Program, recognizes as well as anyone that preventing the next crisis - or at least minimizing its likelihood - is as important as mapping out what happens once it hits. And yesterday, both she and the agency that she first proposed, the Consumer Financial Protection Bureau, again helped turn the spotlight on that crucial goal - and on evidence that some congressional Republicans still haven't grasped a key lesson from the last crisis.
In an op-ed in the American Banker, Warren and U.S. Rep. Maxine Waters (D., Calif.) warn against legislation they say would again expose consumers to the kinds of "faulty mortgage products that wrecked the economy":
Alas, you don't have to look back to the years before the 2008 crisis to find evidence that the problem lingers. In an enforcement action announced Tuesday, the CFPB filed a complaint against a Utah company, Castle & Cooke Mortgage LLC that illustrates how some mortgage originators continue to behave in ways that needlessly increase default risks.
The CFPB's complaint outlines the basic problem - incentive structures designed to push borrowers into costlier mortgages that are more likely to lead to defaults:
The CFPB says Castle & Cooke originated about $1.3 billion in loans in 2012, and does business in about 22 states. Its website lists just 13, largely in the West and South. In an email statement reported by the Salt Lake Tribune, a spokesman said the company "has been cooperating with the CFPB in its investigation for more than a year, and anticipates an amicable resolution in this complex regulatory matter."
The CFPB estimates that Castle & Cooke loan officers have earned more than 1,100 illegal quarterly bonuses since April 2011, when the rule took effect, and that "tens of thousands of customers" were likely pushed into more expensive mortgages than they should have been offered.
Those mortgages, in addition to gouging borrowers, are potential building blocks for the next financial crisis. Warren and Waters are right to warn against legislation that could re-open the floodgates to more of the same.