John M. Reich - Regulation and Reform

Regulation and Reform

An ardent foe of regulatory red tape, Reich dedicated much effort and public testimony toward reducing regulatory burdens on financial institutions and, beginning in 2005, led a three-year interagency review of all federal bank regulations, mandated under the Economic Growth and Regulatory Paperwork Reduction Act of 1996. Then Director of OTS, Reich championed more regulatory independence and discretion for his agency in the cause of efficiency and regulatory burden relief.

On April 6, 2006, Reich voiced his concern that banks were allowing an overall slippage in underwriting due to increased competition in certain market segments and geographical areas as banks tried to feed loan volumes after the real estate market peaked. He also cited the increased sales of alternative or nontraditional mortgage lending products like “interest-only” and “pay option” adjustable rate mortgage (ARMs). These loan products were legitimate and valuable, according to Reich, suggesting the main danger was from institutions with limited experience in these loans and managing the associated risks, particularly the inherent credit risks. However, of the five leading issuers of option adjustable-rate mortgages, three — IndyMac Bank, Washington Mutual and Downey Financial — would fail. Countrywide Financial, the largest, was forced to sell itself to Bank of America for a small fraction of its previous value or fail. AIG Financial Products, regulated by OTS, would also fail, . AIG FP was a major issuer of Credit Default Swaps related to the securitized, outstanding interest of these and other subprime loans.

On July 21, 2008, following the failure of IndyMac but before the failures of Washington Mutual, AIG and Downey Financial, Reich described his agency's "Financial Institution Reform Initiative":

I believe Congress should help create a level, scrupulous and well-regulated playing field so consumers and investors have confidence in the transparency, fairness and integrity of all mortgage originations. The standards of the under-regulated segments of the market must be raised to the level followed by the federally regulated segments. All entities that originate home loans should be required to comply with basic credit principles, such as conducting a reasonable assessment of each borrower’s ability to repay.

In those same remarks, he described the role he felt his agency should play:

Selecting a strong regulator to monitor this new level playing field is critical for protecting consumers and restoring market confidence. I won’t pretend to be a disinterested party, but I know that the OTS has the most extensive expertise of any regulatory agency in the oversight and supervision of mortgage banking operations and I believe the OTS is in the best position to assume federal authority to regulate the currently unregulated players in mortgage banking.