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By Ronald Fink
A consumer protection agency for financial products would not be necessary if state regulators applied usury laws to securitized loans, according to an analysis published on Sunday.
Such an agency has been proposed by Chris Dodd, the Connecticut Democrat who heads the Senate Banking Committee but has announced his retirement. Dodd indicated last week he might jettison his proposal in the face of opposition from the banking industry.
But the analysis by Georgetown University law professor Adam Levitin contends such an agency would be less effective than state regulation. Federal bank regulators are far less numerous than state regulators, and so, says Levitin, more easily influenced by the bank lobby.
Levitin also argues court rulings that federal regulation preempts state oversight of federally charted banks, which have come to dominate mortgage and other consumer lending, don't apply in the case of securitized lending, since it relies on investors in the secondary market to set the terms.
Levitin notes that 60 percent of mortgage debt and 25 percent of other consumer lending is now securitized.
The law professor says state regulators have yet to take advantage of their freedom to apply usury laws to this form of lending and should do so in light of the failure of federal regulators to rein in abuse. Levitin's analysis relies on a paper he published last January.
"Because preemption doctrine only prevents the direct regulation of federally-chartered financial institutions, it does not prevent states from channeling the pressures of the market to use regulation of the secondary market as a tool to regulate upstream in the origination market indirectly," Levitin wrote in his paper.
In his post on Sunday at the web site, Credit Slips, he observed that "there's no law directly on point, but if I'm correct, then usury could be raised as a viable defense to the collection of a sizable portion of consumer debt."
Levitin also contends that his proposal would go a long way to put the financial industry on a sounder footing, since securitization encourages banks to take more risk than they otherwise would in the mistaken belief that they shift much if not all of it to investors through the process.
"It was troubles in the mortgage market, stemming in part from unscrupulous lending practices, amplified by various new and untested financial products, that brought down or nearly brought down a wide range of interconnected financial institutions," he wrote in his paper.
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