Some legislators saw the dilemma
Slate has an article on AARP designed legislation in Georgia.
Under the Georgia Fair Lending Act, however, players in the secondary mortgage market could face serious liability if they so much as touched a predatory loan. The AARP, which drafted the model legislation that formed the basis for the Georgia law, explained that imposing liability on downstream owners would “reduce significantly the amount of credit that is available to lenders who are not willing to ensure that the loans they finance are made in accordance with the law.”
The secondary market has an extraordinarily difficult time, however, distinguishing predatory loans (bad) from appropriately priced subprime loans (good). Even if the line could be drawn with confidence, the market lacked the resources to gather the necessary information. As the General Accounting Office noted in its comprehensive review of predatory-lending legislation, “even the most stringent efforts cannot uncover some predatory loans.”
Inevitably, then, the secondary mortgage market in Georgia’s subprime loans ground to a halt. And that was the point: If buyers couldn’t satisfy themselves that the loans they bought weren’t predatory, they should take their money elsewhere. Georgia understood that impeding the capital flow to subprime loans might raise the cost of borrowing for some state residents—those who, for one reason or another, had poor credit but could and would repay high-priced loans. But Georgia judged that this was more than balanced by protection for its most vulnerable from the scourge of predatory lending and the wrenching costs associated with overpayment and eventual foreclosure. New York, New Jersey, and New Mexico made the same judgment and within two years had enacted their own versions of laws exposing downstream owners of loans to fines if they bought predatory loans.
The OCC is a somewhat conflicted agency: While its primary regulatory responsibility is ensuring the safety and soundness of the national bank system, almost its entire budget comes from fees it imposes on the banks—meaning that its funding depends on keeping them happy. It was unsurprising, then, that the OCC leapt to attention when the national banks asked it to pre-empt the Georgia-like subprime laws on the grounds that they conflicted with federal banking law.
While the banks’ legal arguments were thin, the OCC issued regulations in early 2004 nullifying the state laws as they applied to national banks. In part, the OCC reasoned that the states just got it wrong: As the then-comptroller explained in a speech to the Federalist Society, “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 were free to engage in the sharp 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.)
Legal interest per centage rates can go up to 36% on credit cards. Aren’t these guys just exuberant?