Published: April 17 2007 19:56 | Last updated: April 18 2007 01:11
The US Supreme Court on Tuesday stepped into the subprime lending crisis with a potentially far-reaching ruling that limits the power of individual states to regulate mortgage lending.
The ruling came as federal bank regulators responded to criticism that they had been slow to act over the crisis and cleared the way for lenders to offer relief to distressed homeowners.
Regulators told banks they would “not face regulatory penalties” if they offered borrowers new terms.
The Supreme Court ruled 5-3 that banks regulated by the federal Office of the Comptroller of the Currency had a broad shield from additional state regulation.
Though it did not directly involve subprime lending, it could have a big impact on the ability of states to act independently on predatory lending and throws the spotlight on federal authorities.
Many consumer advocates had hoped that individual states would be able to step in more quickly than federal legislators or regulators.
Several congressmen are trying to craft a national solution to the burgeoning crisis in subprime mortgage lending.
Allen Fishbein, director of housing for the Consumer Federation of America, said after the court decision: “This is really disappointing news.” He said it could work to the detriment of consumers.
The case, which tested whether Michigan could regulate the mortgage-lending subsidiaries of Wachovia, a national bank, split the court in an unusual way, with its most liberal member, John Paul Stevens, joining conservatives Chief Justice John Roberts and Antonin Scalia dissenting in defence of the right of states to regulate in this area.
Eliot Spitzer, then attorney-general of New York, had argued that states cannot protect their citizens from predatory mortgage practices if they are pre-empted by federal regulators.