Anonymous Banker received the answer to the question posed below: The answer is NO….. An individual may not use the bank’s violation of Regulation H as a Private Right of Action in its defense against foreclosure. Too bad – the banks should be held responsible for violation of this Regulation, which I believe is at the root of our economic crisis.
This time, I’m looking for advice. I have a theory that I’d like to have reviewed by attorneys that have some knowledge of foreclosure litigation.
Here are my thoughts. Perhaps you could tell me if my plan has any merit.
There’s a law on our books called Reg H. The law and the related Interagency Guidelines defined what procedures banks needed to follow with respect to lending secured by real estate. Banks must, “adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interest in real estate. Policies should be consistent with safe and sound banking practices; appropriate to the size of the institution and the nature and scope of its operations; and reviewed and approved by the bank’s board of directors at least annually.”
My thought is that banks that issued sub-prime mortgages, specifically no-income and no-asset verification loans, violated Reg H. The Regulators must have identified these violations and cited them in the examination reports, but these reports are not available to the public.
I believe that we must stop the foreclosures in order to begin the economic recovery process. While the banks say they are modifying mortgages in an effort to help the economic recovery of this nation, their efforts are nominal. In the scheme of the problem that they themselves created, they must be required to do more. They continue to foreclose on properties and withdraw credit from the business marketplace. They are merely making knee-jerk reactions, rather than effectively evaluating credit on a case by case basis. In many cases, credit lines to businesses are being cancelled even though the business owner has not missed even one payment.
While I do not believe that any form of class action suit would be beneficial to our economic recovery, I do believe that individuals have been directly harmed by the banks violation of Regulation H.
What I want to determine is whether or not an individual can utilize, in their defense against a foreclosure action, the banks violation of Regulation H. I believe this has to do with “private right of action” with respect to a Regulation such as Reg H.
My thought is this. If banks begin foreclosure proceedings and it is found that they approved the application in Violation of Reg H and Safe and Sound Banking practices, perhaps the courts could rule in favor of the homeowner and prohibit the foreclosure. What can’t happen is that the courts negate the debt. Rather, they must find a way to force the banks into modifying the terms of the mortgage.
The theory is not a perfect one, I’m sure. But I think it deserves further consideration by the legal industry and our judicial system.
Exerpt from one of my previous articles that might help support this position:
Bank regulators are our first line of defense: Office of Comptroller of the Currency, Treasury, Board of Governers of the Federal Reserve System, FDIC, Office of Thrift Supervision. After Congress passes a law they leave it to the regulators to put the law into effect by writing and adopting regulations. Our regulators have one, and only one real purpose – to ensure that each and every bank operates in a safe and sound manner. In order to accomplish this, they send out teams of examiners – routinely, to every single bank in the country – to delve into the bank’s activities and check them against the requirements of regulations. This whole procedure, the laws, the regulations and the agencies to examine compliance with the regulations – was put in place to protect the depositors’ money, the banks that hold that money and – on a national scale, our country’s economic safety and soundness. This process began 75 years ago, after the banking industry collapsed and led us into the Great Depression.
Federal Reserve Regulation H is a “uniform” regulation. This means that each of the other three agencies also adopted an identical regulation at the same time. They are found in 12 CFR 208.51; 12 CFR 34.62, 12 CFR 365 and 12 CFR 560.101. Links to each of these are provided at the end of this article. This is some of the content of Reg H and it is directed at all banks.
The Real Estate Lending Standards section requires banks to “adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interest in real estate. Policies should be consistent with safe and sound banking practices; appropriate to the size of the institution and the nature and scope of its operations; and reviewed and approved by the bank’s board of directors at least annually.”
It instructs banks to monitor conditions in the real estate market in its lending area to ensure that its real estate lending policies continue to be appropriate for current market conditions.
And it requires that the adopted policies reflect consideration of the Interagency Guidelines for Real Estate Lending Policies established by the federal bank and thrift supervisory agencies.”
The Interagency Guidelines, which are part and parcel of the regulation, are extensive and I’ve provided links below to the full text document. But the following quotes will make my point.
“Each institution’s policies must be comprehensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many institutions’ business plans and, when undertaken in a prudent manner, will not be subject to examiner criticism.”
“The institution should monitor conditions in the real estate markets in its lending area so that it can react quickly to changes in market conditions that are relevant to its lending decisions.”
“Prudently underwritten real estate loans should reflect all relevant credit factors, including-
- the capacity of the borrower, or income from the underlying property, to adequately service the debt;
- the value of the mortgaged property;
- the overall creditworthiness of the borrower;
- the level of equity invested in the property;
- any secondary sources of repayment;
- any additional collateral or credit enhancements (such as guarantees, mortgage insurance, or take-out commitments).”
Our regulators were armed with this law and these guidelines. And yet, when they examined the banks and discovered that they were not applying a credit review process that was consistent with safe and sound lending practices, in spirit or in fact, they failed to impose penalties that would have brought these horrific lending standards to an abrupt end. They knew that the banks were issuing no-asset and no-income-verification loans, delving into subprime lending markets, selling these toxic loans into the market and subsequently repurchasing them to hold in their capital accounts.
From PNC’s 10K statement:
We are subject to examination by these regulators, which results in examination reports and ratings (which are not publicly available) that can impact the conduct and growth of our businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. An examination downgrade by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of our operations. We are also subject to regulation by the Securities and Exchange Commission (”SEC”) by virtue of our status as a public company and due to the nature of some of our businesses.
As a regulated financial services firm, our relationships and good standing with regulators are of fundamental importance to the continuation and growth of our businesses. The Federal Reserve, OCC, SEC, and other domestic and foreign regulators have broad enforcement powers, and powers to approve, deny, or refuse to act upon our applications or notices to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations.
Sources: 12 CFR 34.62