(Archived Content)
FROM THE OFFICE OF PUBLIC AFFAIRS
JS-437
Thank you for this opportunity to speak to you today. Ashville is such a lovely setting.
Just last year we had an important Abernathy family celebration. We commemorated the 350th anniversary of the arrival of the first Abernathy in this free land of America. Robert Abernethy had come from Scotland, where he was not so free. He landed in Jamestown, courtesy of Oliver Cromwell and the English Parliament, as a prisoner of war. Robert had been given a choice: Virginia or the Tower of London. He chose Virginiaand I am glad that he did. Afterward, several generations of Abernathies made Tidewater Virginia their home. By the time of the Revolution, many Abernathies and a lot of other Scots had migrated to the hills of North Carolina. Not far from this place, just over the ridge to the east, especially in Catawba, Burke, Lincoln, and Cleveland Counties, Abernathy is a rather common name. My father used to tell me that Grandpa was the first Abernathy to come down out of the hills. And when you come to a setting such as this, you dont wonder why people were so reluctant to leave.
North Carolina is a fitting location for a meeting of the Conference of State Bank Supervisors. I think perhaps as much as any State, North Carolina exemplifies the benefits of our nations dual banking system. Here you find very big banksand we can all name them. And here you find some small banks, that maybe few of us can name. But they are strong banks, and they operate and compete side by side.
By the end of last year, there were 110 banks headquartered in North Carolina. Two had assets of more than $300 billion each. Seventy-six banks had assets of less than $300 million each. Yet all are committed to helping families named Abernathy and all the other many family names from all of the other places, to buy their homes, pay their bills, send John and Sarah to college, save for retirement, build a business, and meet the thousands of other services for which we rely upon banks. These banks grow, expand, and prosper, as they help these families and their communities grow, expand, and prosper. There is no other way. Which is one of the things that has always puzzled me about the Community Reinvestment Act: it seems to be telling banks to do what they already do best, build their communities.
Our dual bank system is strong, because it is the best system for meeting the needs of our communities and our families. I know of no nation in the world that has anything quite like this system, our great dual banking system. It is nothing we planned. It is one of those marvelous fruits of the genius of our founding fathers, of this wonderful federal system of government that is our American Republic. You wont find the dual banking system detailed anywhere in the Constitution. It is rather the organic outgrowth of the interplay of two important provisions of the Constitution: Article II, Section 8, that gives to Congress authority to set national standards for national commerce; and the Tenth Amendment, that preserves for the States powers not reserved for the Federal Government.
There has been a tug of war between the Federal and State governments for more than 200 years since, and banking has often been the rope. And the rope has sometimes been pulled one way and sometimes the other. From time to time, one side has nearly pulled the other all the way over.
Outside of my window at the Treasury Department is a bronze statute of the first Secretary of the Treasury, Alexander Hamilton. He can perhaps be called the father of the First Bank of the United States. His idea was to bring under one standard what was then a variety of banking products, currency in particular. And his vision succeeded for a time. Then the rope was pulled the other way, the Banks charter lapsed, and a brief experiment in national banking ended, for a time.
Outside of the door to the office of the General Counsel of the Treasury is an imposing painting. It is nearly life size. Standing there, arms crossed, with brooding eyes that follow you wherever you go, is the image of Salmon P. Chase, Abraham Lincolns first Secretary of the Treasury. Secretary Chase left an impressive record of institution building. Three of his institutions are with us today: the Internal Revenue Service, the Bureau of Engraving and Printing, and the National Bank System. Secretary Chase had a big job. He had to fund the biggest war the United States has ever fought, and he had to fund it with half the nation in rebellionand it wasnt rebellion against the Internal Revenue Servicethough I suppose that the IRS was used to get the southern States after the war to help pay off the bonds used to finance their defeat.
To market those bonds, Secretary Chase proposed a system of national banks. But the Secretary was creative. Not only would the national banks market the bonds, but they would also issue a uniform national currency backed by those bonds. A network of national banks sprang up almost over night, and the dual banking system has been with us ever since.
But as the rope pulled that way, it almost pulled too far. Concerned that Federal bank notes had not replaced the bank notes of State banksthat a single national currency had not yet been achievedthe Congress imposed a 10% tax on all bank notes other than those issued by national banks. That did it. State bank notes disappeared, but so did State-chartered banks, or very nearly. In 1863, the year of enactment of the National Bank Act, there were just under 1,500 State-chartered banks. In 1865, with the taxation of State bank notes, there were less than 350 State banks, while there were just shy of 1,300 national banks. Consumers benefited from a uniform currency, portable to all parts of the nation. But the dual banking system was going, going, but not quite gone.
What remained was the ability of States to experiment and bankers to innovate. Unable to compete with national bank notes, State banks gave new vigor to what has become a commonplace of everyday financial life, personal checks. And a broad system of business and consumer checking gave new life to the dual banking system, national and State banks. By 1890, there were 3,484 national banks, and 2,250 State-chartered banks. And the revitalization continued. By 1913, there were over 24,000 banks in the United States, and two-thirds of them had State charters.
From this tug of war, new and better products and services are developed for families and businesses. I could point to many other innovations made possible by our dual banking system, our system of real life laboratories, competing for how best to serve their customers. Interest on checking accounts, adjustable rate mortgages, and nation-wide branch banking are just a token of the innovations that have occurred in recent years. Each of you can think of others.
I hope that this tug of war never ends. By that I mean, I hope that neither the Federal nor State governments gain the upper hand. This makes undoubtedly for an inefficient system of government, but I dont think that the founding fathers had efficient government as a goal when they divided authority between a Federal government and the States, and further divided Federal authority among three separate branches, and split the Congress into two separate and very different Houses. No, that was not very efficient government, but it has proven a very efficient means of preserving individual liberty, and I suspect that this was the outcome that the architects of the Constitution had in mind. It is that liberty, that liberty to create, to experiment, to innovate, that has placed this country in the forefront of so many things that better the lives of our citizens, financial services being high on the list.
With a government of the people, by the people, and for the people, government must add to the quality of our lives for it to be tolerated. Our dual banking system is a powerful governor for ensuring that bank regulation meets the needs of our people, that it adds to the vitality and versatility and creativity of our economy.
Let us take a look at predatory lendingas a case in point. And, by the way, let me digress just a moment. Among all the attention that has been paid to predatory lending, I am eager for attention to be turned as well to predatory borrowing. I have in mind the person who in a calculated way borrows as much money as he can, with little thought of paying it back or, in some cases, with a premeditated intention of not paying it backthe person who takes advantage of all of the statutes created to protect the truly unfortunate, who perhaps even plans to take advantage of generous bankruptcy homestead protections, who amasses as much debt from other peoples money, and then declares bankruptcy as the final stage in a predatory borrowing plan. Hopefully, Congress will succeed this year in adopting the long forestalled bankruptcy reform legislation that will get at some of these predatory borrowers. I hope that will happen, and soon. It has been delayed too long.
Is the predatory borrower rare? I hope so. I suspect that he is as rare as the predatory lender. And we need to act against both.
Now with regard to the dual banking system and predatory lending, I need to take care whenever I discuss the subject of predatory lending. All of us may not be in agreement on what we mean by it. I think that it is something like aggressive driving. It reminds me of aggressive driving. We are all familiar with the campaigns against aggressive driving. Im sure that we support those campaigns, because we have all likely been witnesses to aggressive driving. You all know what I mean when I am talking about aggressive driving. Its not really a new crime in and of itself. It is a label attached to a group of unsafe driving practices, each illegal in and of itself: speeding, tailgating, illegal lane changes, and the like. There is a law against each of these practices. By and large what was new about aggressive driving was the law enforcement effort focused on curbing these practices. Penalties were increased, law enforcement officials were put on the look out, the population in general was sensitized. And a lot of progress was made against the problem.
I think that predatory lending may be much like aggressive driving. In my previous job I worked on Capitol Hill, for the Senate Banking Committee. In an effort to come to grips with concerns raised about predatory lending, we asked each of the banking regulators to give us a definition of it and share with us their statistics on how prevalent the practice was. At the timeand this was a few years agonot a single banking regulator could give us a definition of predatory lending. It was no surprise, then, that neither could they give us statistics on its prevalence. If you cant define it, you cant measure it. They could offer us anecdotes, examples of what they termed predatory lending.
These included practices such as fraudulent loan terms, changing conditions without the knowing consent of the customer, offering loans to people who had no real possibility of meeting loan payments, hidden fees, and so forth. Each of these is already a violation of banking laws and regulations.
So, if like aggressive driving, predatory lending signifies an increased focus on enforcing the existing laws against these practices, then I am sure that all but the predators would be in favor of that enforcement effort. Much to my dismay, however, so many anti-predatory lending proposals are more focused on products than they are on practices. And there I fear the effort goes astray, far astray.
Over the last several years, State and national banks have made enormous strides in expanding the reach of their services. Millions of people are new customers of mainstream financial institutions. These are people who used to be on the outside, looking in, people on the periphery, customers of the more informal providers of financial services. Now they have a mortgage, a checking account, a savings account, an IRA, a credit card, and many other banking services. I dont want to do anything that takes us back. I dont want to do anything that slows down our progress. We need to facilitate the outreach and innovation that best meets the needs of consumers, all consumers.
But so many of the anti-predatory lending proposals would undermine that progress. They cut people off. They put financial services out of reach, because they focus on products rather than on bad practices. I am not willing to sign up for a program that says that subprime lending, for example, is bad. Bad subprime lending, badly underwritten, or fraudulently offered, is bad. But a good loan is a good loan, be it prime or subprime. The same is true for other financial products.
Lets take a look at another example, loans with balloon payments. These products make it onto the lists of predatory lending proposals; balloon payments can be found on the prohibited lists. Are balloon payments evil products, or do bad actors put them to bad service?
Consider the young family, just starting out, John and Sarah Jones. Both John and Sarah have nice, early career jobs with bright prospects. They have worked hard and saved even harder. They have accumulated their nest egg for what they dreamed of in those dreamy days before they were married: a house of their own. They nourished that dream with every dollar they put away for building a down payment. Now they have the down payment. But now they also have a problem. Actually, it shouldnt be a problem. John and Sarah dont see it as a problem. They are delighted. They are expecting their first child. They would like to bring the baby home, to their own home. Sarah wants to stay home with the baby, at least for a while. But that means that their double income will soon reduce to a single income, at least for a while.
An innovative industry will say, We have just the loan product for you. It has what is called a balloon payment. Under this loan, you pay a reduced monthly payment for the first five years, and then you pay a higher monthly payment afterwards. In essence, for the first five years you are deferring part of the payments until later. This works perfectly for the Jones family. They get into their house today, with payments that they can afford while they are a one-income family, with later higher payments that they can afford when Sarah returns to work or maybe when John is making much more than he does now.
But wait! Not so fast! Under some proposals, that loan would be labeled predatory lending. Maybe John and Sarah think that this product is tailor-made for them. But balloon payment loans are on some financial regulatory proscriptions. Some would say to John and Sarah, No, you cant go there. Too dangerous. You just keep renting for a while, and then after a few more years, maybe then you can buy your own house.
That is the kind of answer we get when we focus our attention on banning products rather than bad practices. Keeping John and Sarah out of a house of their own is unlikely to add quality to the lives of this family. It would be an intolerable regulatory restriction on their choices.
But the dual banking system says to John and Sarah that they do not have to live with that answer. While some communities, in perhaps an exercise more of good intentions than wisdom, are banning products that bring people into the financial mainstream, the national bank regulator, the Comptroller of the Currency, is turning a bright focus on bad practices while preserving innovation in products. Where a local law might keep John and Sarah in their apartment for several more years, national banks might offer a product that fits their family needs today.
Now, I want to be clear. Any financial product can be abused. Balloon payment loans have been instruments of abuse. But it was the way that the balloon payment was used that was abusive. It need not be used that way. Properly disclosed and understood, such a loan can be a useful product for consumers.
I also want to be clear on what I am praising. It is the dual banking system. It is the system that says that the right answer is in a national bank one day, in a State-chartered bank the next. And the right answer is what best serves the needs of Americas consumers. Today, it may be the focus of the Comptroller on bad practices rather than on banning products. Yesterday, it was the State bank that offered an adjustable rate mortgage, or paid interest on a checking account. What and where will it be tomorrow? I dont know. But I am glad that America has a strong dual banking system to let it happen. And in exercising their freedom, American consumers will find it.