Seven years ago, when I was Deputy Commissioner of Corporations for the State of California, I can’t say that I anticipated a worldwide financial crisis as a result of sub-prime mortgage lending. But I did know that vulnerable populations were going to get sucked into dangerous financial transactions. Poor and middle-class families were going to suffer.

If there was one thing I wanted to achieve at the Department, it was educating the public about the perils and benefits of borrowing and investing. I put together a proposal called STOPP (“STatewide Outreach On Predatory Practices”), a $10 million education and enforcement program funded with the reserve the Department built up from licensing fees — in other words, no taxpayer money. Governor Gray Davis, to his credit, put my proposal in his budget:

Unfortunately, led by a legislator motivated, I think, more by ignorance than malice, a budget committee whittled the outlay to a few hundred thousand dollars. This despite the fact that the money could not be used for schools or electricity or anything other than costs associated with the Department’s mission, which is regulation of the financial industry. A couple hundred thousand doesn’t buy you much education in a state as big as California, so, as can be seen in the video at the top of this post, I focused our limited efforts on Latinos.

I was thinking about my time at the Department today because of the recent unveiling of a proposal to streamline the nation’s financial regulatory agencies. One of the explicit purposes of the plan, as reported by Edmund L. Andrews of the New York Times, is to “eliminate the inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any federal encroachment.”

I’m as interested as anyone in getting rid of the patchwork quilt of standards that makes it hard for companies in any industry to do business in multiple states, but only if the national standards are strong enough. The standards with regard to securities weren’t strong enough in the Nineties, which is why it took the states to step in and police the market. The standards with regard to emissions aren’t strong enough, which is why Governor Arnold Schwarzenegger is suing the EPA.

Another of our fights while I was at the Department of Corporations was with the Office of the Comptroller of the Currency, the federal bank regulator. Wells Fargo was proudly advertising their Department license while charging fees to borrowers that, while legal nationally, were not legal in California. Federal law allowed banks to charge borrowers for interest between funding and recording the loan, California state law didn’t. The Department found that Wells was imposing these charges (to the tune of hundreds of dollars per homeowner), asked the bank to make refunds, the bank refused, complained to the OCC and a federal lawsuit ensued. One of the questions I had through the whole process was why did Wells apply for a California license if they weren’t going to abide by California law? The other was when was the OCC ever going to go through the books of local branches in Eureka and Chula Vista to ensure that consumers were being treated fairly?

I worry that the proposal to expand the Fed’s authority has more to do with protecting Wall Street than Main Street, but we’ll see how it all plays out. I still believe the best thing we can do for ordinary investors and borrowers is educate them. I just wish I could have done more to make that happen when I was in state government.

This entry was posted on Saturday, March 29th, 2008 at 11:57 am and is filed under Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.